Everyone’s investing journey has to start somewhere.
No matter what age you are, it’s never too late to begin.
However, it may be a daunting task for new investors because of the steep learning curve.
The internet has enabled a wealth of information to be made available to everyone, and it can take time and effort to sift through it to find what’s relevant.
You need not fret, though.
Here are some basic steps to help you get started so that you can invest safely and profitably.
Diversify your investments
An important mantra in investing is not to put all your eggs in one basket.
There’s wisdom in that advice as a sudden, unexpected piece of bad news could cripple your portfolio should it be too concentrated in either one or a few stocks.
Investing is a probabilistic exercise with no certainties.
As such, it makes sense to spread your bets to minimise your risks.
Some tout the advantage of investing in just a few eggs but watching those eggs closely to ensure nothing goes wrong.
The problem with this logic is that many external factors may derail your investments that are completely out of your control.
An investment portfolio with around 15 to 25 stocks is usually sufficient for adequate diversification.
Another point to note is that you should ensure you are diversified in both sector and region.
For example, buying all three Singapore banks and the two local telecommunication companies (telcos) does not amount to reasonable diversification.
The bulk of the portfolio is concentrated in just two sectors — banks and telcos, and all five businesses are listed on the same stock exchange.
Keep some cash handy
While some investors may see the benefits of having their cash fully invested at all times, I am against this practice if you are starting out.
Keeping some spare cash on the side allows you to take advantage of attractive investment opportunities.
That’s because no one can reliably predict stock market movements.
The current pandemic has demonstrated that a sudden downturn can crop up unexpectedly, causing share prices and valuations to plunge.
Bear markets are part and parcel of investing and open up opportunities for you to scoop up shares of solid companies.
Should share prices plunge suddenly and you have no cash to deploy, you’d be missing out on the chance to buy on the cheap.
Hence, keeping some cash handy as dry powder that can be rapidly deployed if a suitable opportunity arises.
This cash could come from savings from your salary or bonus as well as dividends received from existing investments.
Monitor Your Investments
It’s enticing to think of buying and then just holding an investment over decades, letting your money compound to a sizable amount.
However, there is the risk that the business may face disruption, stiffer competition or changing economic conditions that render your original investment thesis invalid.
Rather than blindly following the popular “buy and hold” advice, I believe it should, instead, be amended to “buy and monitor”.
No matter how great a company may be, it’s always susceptible to unpredictable shocks or unexpected events.
By keeping a close watch on the financial health of your investments, you can be kept in the loop if problems persist.
And when trouble brews, you can then decide if you should hold on to your shares, or if it makes better sense to sell and move on.
Size Your Positions Wisely
The final rule is to make sure you size your investment positions wisely.
Assuming your portfolio has a total of 20 positions, the size of an average position should take up 5% of your portfolio (100 divided by 20).
When assessing how much of a company you should own, start by reviewing how risky it is.
A higher-risk investment could mean the company exists in a cyclical sector, is more prone to intense competition, or could be burdened with a ton of debt.
When you encounter situations where the risk is perceived to be higher, it makes sense to size the position smaller, implying perhaps a 1% to 2% position.
On the flip side, if you invest in solid, blue-chip companies that provide peace of mind, then it’s fine to allocate more money to such positions.
Such positions can then be larger than a typical 5% allocation.
This aspect of portfolio management helps you to minimise your investment risk while also providing ample opportunities for the portfolio to perform well over the long term.
This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.