“Investing is a matter of personal style”. This refrain has been said often enough that any opposing view is considered trampling on freedoms and liberties. Being part of the investism phenomenon, businessmen, consultants, bankers and even closer to home, bosses, managers, uncles, aunties, financial literacy advocates accept it as a kind of universal wisdom.
I beg to differ.
At the foundational, fundamental, basic level, there is a “right” way to invest. That level of investing comes with a set of rules and strategies that need to be fulfilled before considering more advanced techniques.
Using a dressing analogy, the basic rule of investing is not to go out naked. After you’ve made the decision to clothe yourself, then sure, style choices might come in.
In dressing, the basic rule of avoiding the sartorial opprobrium of self-shame and indecency is presumed. Believers of nudism might disagree and they would have caused less mischief than believers of investism. For example, promoting stock-picking and trading systems to people who have no idea is still considered fair game for people in the know.
There are also basic rules for other games which are rarely, if ever, up for discussion. Football – don’t let in goals. Tennis – don’t double-fault but the two-serve grace allows for a profit-maximising free first serve. Chess – control the centre, move valuable pieces later. Russian roulette – don’t play, too risky. Poker – don’t play lousy hands, don’t use bluffing as a major strategy. Marathon – pace yourself, it’s a long run.
I might not have summarised these basic strategies with the nuanced insights of experts but the basic principle for winning games seems to be converging around the idea (law?) of avoiding shooting oneself in the foot. Absent are explicit strategies to go for the kill or maximise points.
Many of the basic rules are couched in the negative – don’t do this and that – as though checking our collective greed from getting out of hand. Establishing a firm footing in loss avoidance will open up opportunities towards developing victories. I think that’s the reason why it’s not very smart in football to attack with a 10-0-1 formation even if that might stand a chance of overwhelming the other team’s defenses. In fact, in football, chess and many other games, there are many situations where the denial of the other’s victory with a draw or stalemate is itself a win for the denier.
In poker, bankroll management is a strategy which starts before the game even begins. This is where a player would never put too much money on the table as a form of wealth protection. From an investing viewpoint, this is like saying I don’t have the luxury of burning a big chunk of my money in some hot stock tips or money scheme or even a well-intentioned investment recommendation.
There is however a bigger reason why the basic rules of investing are not a matter of personal tastes compared to sports, games and fashion. The reason is that the investment game if not played properly can screw up your plans or indeed your life. Investing not done right may delay your retirement. Your children may not get to go to university. Your plans for fuck-you money becomes elusive. Such life decisions are not as simple as double-faulting on the court or choosing between a red and black dress.
The race against time makes such avoidable mistakes costly and unnecessary. As you get older, it might be too late to say, ah well, I’ve learned my lesson, let’s try again. We can’t make big bets like Warren Buffett because we can’t lose like Warren Buffett. In other words, a departure from the basic rules is a very thin line between strategy and gambling
Here then are ten basic investing strategies that may make you more money than eking out a living in fundamental analysis, P/E ratios and dividend yields:
- Personal/career development
Whether it’s a full-time job or hustling gigs or both, making yourself good at what you do is going to be a more major source of profits and fulfillment than gambling in the stock market. Wiring one’s mind for happiness through relationships and knowledge is also high yield. The good thing about developing yourself is that you can establish an active income from your career which will feed into your passive investments. Two income streams are better than one! Note: investing is a full-time job, so if you already have one full-time job, you might not have time for another.
2. Pay off expensive debt
Paying off credit card debts is like making a 20% return, hard to beat even by stock-picking standards. Mortgage loans, on the other hand, are considered “good debt” because they are much cheaper and tagged to an appreciating asset.
3. Set up an Emergency fund
Knowing you have savings of 3-6 months basic expenses in the bank lets you fund emergencies without selling long term investments at the wrong time.
4. Buy insurance
The protective dividends from insurance coverage are invaluable compared to having to cash in on your assets in a life and death situation. Online insurance solutions or insuretech are collapsing premiums to cover for death, health and incapacitation cheaply. Most of all, insurance is the best peace of mind money can buy.
5. Reduce cost
A dollar not spent has given you more than 100% return on that dollar, something not easily replicated by stock investment. What if you didn’t spend on a property or a car? How many dollars is that? How do you shift such precious dollars to passive investments to fund happiness goals?
6. Have a diversified portfolio
Don’t put all your eggs in one basket. Vehicles like ETFs allow you to easily diversify and yet not lose out to a stock-picker Eg. World ETFs will give you a portfolio which owns 1,200 leading companies globally. Annual 5 & 10-year returns in USD: 7% and 11% respectively.
7. Diversify the asset classes that you own
The two basic diversified portfolios you will need are stocks and bonds. Bonds are much less riskier than stocks plus they pay interest. The infinite permutations of equity-bond combo will permit you to get decent returns at your selected risk level without doing too much. Eg. Picking the right portions of diversified equity and bond portfolios can give you the same dividend/interest and with less risk vs trying to pick the right high-dividend stocks.
8. Invest according to goals
The more time you have to fulfill your goals, the higher risk you can take and vice versa. Eg. saving for retirement allows you to take higher risk and return and not so if you need a regular income stream in the short term. It is normal for people to have many long- and short-term goals at the same time. A robo-advisor allows you to easily manage this compared to the insanity of DIY investing.
9. Invest at fixed regular intervals
Investing regularly allows you to catch markets at high as well as low points. If one expects assets to appreciate over the long term, then you would have very much improved on your buying costs compared to buying a big amount after markets have risen. Regular investments is also a good discipline which takes out emotional guesswork resulting in a high chance of beating the overall returns of the average DIY investor.
10. Saving on taxes
No amount of investment strategy can better the returns from the many reliefs that are available to Malaysians. If you’re self-employed or have freelance income, you may also want to consider setting up a tax-friendly sole-proprietor or private limited (Sdn Bhd) company.
The conclusion of all this is to make the activities of which stock, which fund, which market, which currency, which commodity very low down the investing decision scale. Sure, some may say that it’s their money and they can choose to do whatever they want with it. But that is as sensible as a professional tennis player saying I have the right to double-fault if I want to. Whether we like it or not, we are forced to be pros in the game of life.