There’s a whole lot of bandwagons to jump on in Singapore. Whether you’re joining a 10 km long queue thanks to the latest froyo/Rotiboy/bubble tea fad or enrolling your kid in coding classes because Ho Ching shared an article about them on Facebook, there are lots of trends to surf if you’re looking for them. No harm done, really, apart from a bit of wasted money.
But things take a more sinister turn when Singaporeans take the monkey see, monkey do approach to investing.
You have only to look at the number of people who fall for investment scams like Suisse International (even though the exact same scam was run a few years back under a different name) to see how easy it is to part people from their money.
Then there are those guys who open stock trading accounts and buy and sell like they’re playing baccarat with the other uncles and aunties at the Resorts World casino.
Yes, most of us do need to invest in order to cope with rising costs in Singapore and to be able to retire someday. But that doesn’t mean you should just jump on the investment bandwagon when you don’t understand what you’re getting into.
Here are some questions to ask yourself before you throw your money into something.
Are you just copying what all your friends are doing?
There is no one size fits all investment strategy, and just because your friend/neighbour/dog are all investing doesn’t mean you should just ask them what investment products they’re buying and then do the exact same thing.
Your boss’s kid might be “dabbling” in forex or penny stocks, but don’t think that doing the same is going to mean you’ll be as rich as that towkay’s son. Your 80-year-old great aunt might store all her money in a sock under her bed, but we sure hope you’re not going to follow suit.
A recent Manulife survey revealed that almost half of the Singaporean parents who invest usually don’t have any knowledge to pass on to their children, and for 1 in 4 that’s because they themselves are clueless about what they’re doing.
People tend to talk about their investments with a lot of bravado. Sure, you’ll hear about how your friend just made $20,000 playing the stock market, but you can be sure he won’t be broadcasting his losses.
If the only basis you have for your investment plans is what your mahjong kaki/cubicle mate/taxi driver told you, hold your horses until you’re a little more informed.
You only know what the upsides of your investments are, but not the downsides
We always hear about how investing puts you on the road to riches, blah blah, but guess what, it’s not all rainbows and unicorns—investing your money comes at a risk.
Your day trader friend might claim he makes 10% per annum on his money, but he doesn’t tell you about how he also runs the risk of losing way more than that.
Before you put your money down on a so-called investment, make sure you know exactly what you’re in for, and what the pitfalls of the investment are. Know exactly how much you stand to lose in a worst-case scenario.
Let’s set aside the argument about whether investment-linked insurance is an actual investment—the fact is, many Singaporeans buy these insurance plans thinking of them as an investment, and expecting to make money out of them at the end of the 10 or 20 year period.
The fact that the insurance salesman is all smiles leads to a false sense of security. Nobody tells them that these policies are actually very risky if you think of them only as investments (read more about investment-linked insurance elsewhere on MoneySmart).
You are investing more than you can afford to lose
So you’ve done your homework, and you know that you’re not throwing your money at some bogus gold buyback scam. You know what you’re in for and you’re prepared to lose that money.
Congratulations, you’re way ahead of the many Singaporeans who haven’t invested a single cent.
But that doesn’t mean you should go overboard and start investing more than you can afford to.
Many Singaporeans already overstretch themselves when it comes to purchasing property. And those who trade stocks or forex know that trading on leverage enables you to basically buy using money you don’t have—which can lead to you losing more than your initial investment. Which is a bad idea for ordinary investors.
Never invest more than you can afford to lose. That means keeping an emergency fund in cash. Even if every single investment you have tanks, that emergency fund can still keep you going. Depending on how old you are and where you are in your career, the amount you’ll have to keep in cash will vary—if you just started working, you probably just need enough cash to tide you through a few months. If you’re retired, you can’t afford to lose as much.
At the very least, always make sure you have an emergency fund so you’re not forced to liquidate your investments, possibly at a loss, should your air con suddenly break down.
Finally, know that investing is only for people who can afford to take care of their daily needs. If you’re investing all your money and then need to live on credit that you can’t pay off, not only are you not growing your wealth, you’d be better off hiding your cash in an old Kong Guan biscuit tin.
Take care of your daily needs first, then invest, not the other way around.
Do you know anyone who is facing the above circumstances and yet is still investing? Tell us in the comments!