Every investor has a system they swear by. I’ll tell you mine: It’s called winning by not losing. It’s even good for a whole bunch of things besides stocks (except that time I coached a soccer team. Turns out 10-0-0 is only a viable formation for sucking). But anyway, let’s look at some systems for investing, and which ones suit you best:
Types of Investors
Everyone in the stock market has a similar goal: To make money one way or another (and yes, there are many ways you can do that – dividends, bonus shares and so on). But the specifics of that goal vary.
You have high-risk traders, who are in it for a punt and want to make lots of money every few months. You have middle-class folks trying to get a decent return on their savings. And there are the low wage earners, who are trying to bust out of the poverty trap. And there are different strategies for different folks.
But for practical purposes, Singaporean investors fall into three groups:
- Conservatives
- Speculators
- Hands-Off Investors
1. Conservatives
If you ask me, this is the “safe” route to financial security. It’s reliable, less stressful, and has all the excitement of watching cheese curdle. Look through the following questions, to see if you’re in this category:
- You’d rather lose the potential to make $10,000, than lose $1,000 in your bank account right now. Even if I make clucking noises. (Y/N)
- You would rather not check how your stocks are doing every day. Constant, urgent decisions about money crumple you like a wet tissue. (Y/N)
- You don’t mind waiting a long time (10 or 20 years) for a big payoff. Just so long as you have some certainty it’s coming. (Y/N)
- You’d rather play in traffic than invest with borrowed money. (Y/N)
- Whenever you make a bad decision (e.g. bought a stock that plummeted), your close friends threaten to kill themselves if you won’t shut up about it, especially since that was five years ago and you’re still whining. (Y/N)
If you answered “Yes” to at least three of these questions, you’re probably a conservative investor.
Conservative investors rely on time and compounding returns to make money. They’re not worried about getting the highest possible returns; as long as their investments steadily beat the inflation rate, they’re happy.
Most conservative investors want principal protection (that is, the original amount invested cannot be lost), and will avoid volatility.
Advantages:
Because these investors rely on long term strategies, they are less affected* by temporary falls in the market.
Their approach is also anxiety free: They can “buy only”, for example, and wait for dividends to roll in. They don’t need to worry about the value of their stock all the time, or try to second-guess the market.
Conservative investors may be keen on perpetual income bonds, index funds, and assets that hedge against inflation (e.g. gold).
*Less affected is not the same as immune.
2. Speculators
Speculators are looking to make money, and within a short time frame. They have a much higher risk appetite than their conservative counterparts; some are willing to take losses now for the chance of a bigger payoff later.
There are actually differing degrees of speculators. Some are calculated gamblers; others are the “damn the torpedoes, full speed ahead” types. We’ll talk more about these differences in future articles.
For now, let’s see if you’re one of them:
- You urgently need money, and don’t have much time to grow it. Or maybe you do have time, but you just want that gorgeous Porsche by Tuesday. (Y/N)
- You don’t mind checking your stocks every day, and constantly buying and selling to maximize profits. You at least know that MACD isn’t the name of a new K-Pop band. (Y/N)
- You think volatility is a wonderful thing. Because how else can you buy so low, and sell so high, in a single day? (Y/N)
- Losing money on investments is okay, provided it gives you a chance to make more money than you’d lose. (Y/N)
- When you lose large sums of money, you can laugh it off a few days later. Easy come, easy go. (Y/N)
If you answered “Yes” to at least three of these questions, you’re probably a speculator.
Speculators often try to time the market: They want to buy when prices bottom out, then sell when prices peak. This requires some knowledge of chart reading, various indicators, and preferably some grasp of technical and fundamental analyses. But this may not be enough all the time.
Some luck, a fail-safe crystal ball, and so on may help too. Most speculators accept, and even prefer, volatility. After all, rapid movements in stock prices are how they generate money.
Most speculators also have a high tolerance for losses. But this is true to varying degrees: Some speculators have strict stop-losses, others are willing to wipe out two or three trading accounts.
Advantages:
Speculators can earn higher returns than their conservative counterparts. Furthermore, they can do so in very short time frames.
Speculators are probably the ones eyeballing high-yield bonds, or emerging and frontier market investments. They can also try to pick undervalued stocks or penny stocks, and hope for the best.
But again, there are differing risk appetites even among speculators; they should consult an independent financial advisor before proceeding.
3. Hands-Off Investors
These are people who invest, but prefer to let someone else manage their portfolio. Examples are people who hire fund managers, or have their savings managed through an investment-linked insurance policy.
Hands-off investing is convenient, as one doesn’t have to learn the nitty-gritty details. Some people also find psychological comfort in knowing that a professional handles their portfolio.
See if you’re one of these people:
- You don’t have the time to track the market, or to attend related seminars. Or maybe you’re not a numbers person, and read charts like senior citizens read far away road signs. (Y/N)
- You are fine with someone else controlling your money. In fact, you think they might do a better job of it. My e-mail is at the bottom of this article. (Y/N)
- You tend to get emotional, and become reckless when you handle your own portfolio. You’re more volatile than any stock. (Y/N)
If you answered yes to at least two of those, you might want to go hands-off.
Hands-off investors are at the mercy of whoever they hire. Their concern is less about picking the right stocks, and more about picking the right fund manager. If things work out well, they get good returns with minimal stress.
However, these investors must accept that the fund manager comes with a management fee. And that fee will eat into the returns of the investment. Also, there is no guarantee that a fund manager will get higher returns.
Advantages:
Some investors feel that fund managers are qualified professionals, and as such, will bring higher returns than if they invested themselves. It is difficult to prove or disprove such an assertion. You will have to decide how much you trust individual fund management companies or fund managers.
The main benefit of hands-off investing, however, is convenience. It reduces the stress and hassle of having to make complex financial decisions.
One product which may seem to be pretty well-known among hands-off investors is investment-linked insurance policies. These double up as life insurance, and offer protection as well as growth.
Next Up
Get a lowdown on the basics of investment products with the next article in our series. Go here to find out more about the diverse world of equities, bonds, funds, REITs and more!
A MoneySmart Investment Series in collaboration with SGX
This is the second article of a 6-part series, focusing on investment for beginners. In our previous article, we touched on why you should be investing instead of saving. For more on starting your investment plans, like SGX on Facebook and subscribe to SGX My Gateway here. Over the next few weeks, we’ll be introducing you to the most basic elements of the stock market, and how a non-expert can still profit from it.
Image Credits:
epSos.de, 401(K), imaginedhorizons, ptrbnmrphy
What sort of investor are you? Comment and let us know!