Dear Smart Investor,
Welcome to 2024! Have you thought about your New Year’s resolutions yet?
For me, it’s all about broadening my horizons by diving into diverse topics through the joy of reading.
I’ll let you in on what I am reading now: “Atomic Habits” by James Clear— this book that not only aligns with my goal of cultivating positive habits but also provides practical insights applicable to various aspects of life, including smart investing.
Whether you’re a seasoned investor or just starting, these insights can make a real difference in your financial journey.
The process of building a habit
Building habits requires a process known as the “habit loop”.
As the name implies, it is a reinforcing loop that grows stronger as you apply it more often.
The loop comprises four distinct steps – cue, craving, response, and reward.
1. A cue will trigger a craving, which then leads to a response (action).
When this response is executed, it will provide a reward for your effort.
This reward is then associated with the original cue that triggered it, thereby completing the loop.
A simple example illustrates this process.
I walk past a café that sells chocolate cakes (they are my favourite). The mere sight of these cakes triggers a craving (hunger for snacks).
The craving makes me enter the café and order a slice of chocolate cake (the response).
Once eaten, my brain gets the reward (i.e. enjoyment associated with consuming the cake).
Building healthy investment habits
Of course, you can argue that the above example is a bad habit as it results in frequent snacking (which adds to my weight).
Rather than engage in bad habits, as investors, we can build good investment habits by harnessing the habit loop.
Building a healthy investment habit with dividend stocks makes a lot of sense.
It’s like setting up a reliable system for your money to grow steadily.
Dividend stocks pay you a portion of their profits regularly, giving you a consistent income. This isn’t just money in your pocket; it’s a reward for sticking to your plan.
Plus, these stocks are like trustworthy friends, providing a steady stream of passive income.
You can use that money (reinvesting them) to buy more stocks, and over time, your earnings can really add up. It’s a straightforward way to make your money work for you.
Say that you want to build a healthy habit of regular investment into dividend stocks such as DBS Group (SGX: D05).
- You can set a reminder on your mobile such that an alert rings when you receive your salary.
- This alert then triggers the craving for future income, prompting you to make a purchase of shares in Singapore’s largest bank.
- The response can be the transfer of cash into an app that allows you to buy shares of the bank monthly.
- When DBS Group declares a quarterly dividend that goes straight into your bank account, that is the satisfying reward you receive from this set of actions.
The receipt of this flow of passive income then becomes the cue to reinvest these dividends to buy more shares of DBS Group.
Like magic, another good habit loop has been formed as the receipt of these dividends forms the basis for a new cue, craving, response, and reward.
Automating the process
You can cultivate any number of healthy investment habits with the above process.
This habit loop can also apply to the reinvestment of dividends from REITs that offer dividend reinvestment plans, such as Mapletree Logistics Trust (SGX: M44U).
Set an alert when you receive your distribution and then proceed to reinvest the dividends using the craving, response, and reward steps as highlighted above.
You can even automate the process to make it more seamless.
A way to do this is to automatically shift part of your salary to a brokerage account that allows you to pull the trigger and buy shares regularly.
By doing so, you can slowly grow your investment portfolio to secure a good retirement and allow compounding to work its magic.
Get Smart: Building a robust investment process through good habits
Good habits take time to cultivate.
Imagine applying these principles to the realm of investment, particularly with dividend stocks. It’s not about complex strategies or fancy financial jargon; it’s about simple, effective habits.
By creating a loop of clear cues, attractive cravings, easy responses, and satisfying rewards, you can nurture a robust investment process.
Whether it’s a reminder to invest part of your salary or an automated system for reinvesting dividends, these habits form the backbone of a secure financial future.
So, as we work to better our financial future, let’s not just invest; let’s invest wisely, building a portfolio that grows steadily and provides a growing stream of income.
Attention: Investors aiming for both growth and peace of mind. We’ve pinpointed 5 SGX stocks known for consistent dividends. If you want to build a retirement portfolio, but don’t want the stress of stock watching, this report is for you. Click HERE to download now.
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Disclosure: Royston Yang owns shares of DBS Group.
