You have some extra money and would love to invest in the stock market to grow your wealth.
You have heard stories about how people make great money by investing in stocks and you want to be like them too.
You have read or seen some advertisements claiming how it is easy to make money in the stock market and how anyone can do it.
But the hard truth is, investing in the stock market isn’t for everyone.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
No matter how much you want to profit from the stock market, sometimes you have to accept the fact that you just won’t make the cut.
So, how do you know if you will do very badly (losing money) in the stock market? Here are the 3 signs:
#1: You are very afraid of losing money
The fear of losing money is real.
Of course, nobody in his right mind enjoys losing money. But for some people, the threshold is really low. Losing even $100 is a big deal and a catastrophic event for them.
Although stocks have performed well over the long run historically, there is no guarantee you will definitely make money after you bought them.
Prices move up and down and this is also known as volatility. During a market crash, prices could drop by more than 50% from its high. Imagine you invested $10,000 and during a crash $5000 is wiped out from your net worth. Would you be able to take it?
Right now, you might say you could. But when shit happens and there is a surge of emotion, most people cannot withstand their money vanished by half.
So, ask yourself truthfully. Will you be able to take the loss gracefully?
I remembered 2011 was the year I first ventured into the stock market and bought my very first stock.
If you could still recall, there was the European debt crisis in August 2011. Market sentiment was very bad and there was a huge sell-off. The market dropped about 20% in less than a month.
I invested about S$8000 in a few stocks and the portfolio value dropped by 50%. It was the first time I experienced a “market crash” and I panicked. I sold all my stocks and lost about $4000.
Was losing $4k painful to me? Yes.
Do I still want to continue investing? Yes.
I was able to take the loss as I treated it as a learning experience, paying “tuition fee” to the market. So far, I have never met any successful investor who had never lost any money before.
But to some people, they can’t bear to lose even $400.
If you are one of those people who are afraid to take any losses, then the stock market isn’t for you.
#2: You simply don’t have enough money
No matter how much you want to be an investor, if you don’t have enough capital, you aren’t able to invest in the stock market. It takes money to make money.
First of all, you should set aside an emergency fund before you even think of investing in anything. An emergency fund is money that you stash aside in case any unexpected expense or event crops up, e.g. – retrenchment, medical expenses etc.
A general rule of thumb is that you should save 3-6 months of your income as your emergency fund. Personally, I have set aside S$30,000 for it. But really, there is no “right” amount. It really depends on your financial situation. If you are single, the amount could be lesser. If you have a family to support, you might need more.
Using myself as an example. Let’s say I have $50k in savings. I will set aside $30k for my emergency fund. That leaves me with $20k for investments.
According to Credit Bureau Singapore, the total number of debtors (eg. credit card debt) hit more than 101k in 2015. If you are broke, you simply can’t invest. Settle your credit card debts first.
My personal view: If you’ve $5000 in your bank account (excluding your emergency fund), you can start investing. Gotta’ start from somewhere. Anything less than that, you’ll be paying a lot for brokerage commission fee. I wouldn’t recommend that.
What if I don’t have $5,000 but still wish to invest?
I understand. When I first started investing, I also didn’t have a huge amount of money to begin with too.
The good news is, you can opt for monthly investment plans, investing with as little as $100 per month. I won’t delve into it too much. You can read more over here.
#3: You have unrealistic expectations
We all know what is the “market rate” for food. If you are in a food court, you are expected to pay $4-$8 for a meal. If you are in a restaurant, you are prepared to fork out $15-$30.
There is a market rate for stock market return too.
One of the greatest investors of all time, Warren Buffett, is able to generate an annualised return of about 23.9% per year. Another notable disciple of Benjamin Graham, Walter Schloss, averaged a 15.3% annualised return over the course of 45 years.
If these legendary investors manage only about 20% per year, what makes you think you can perform better than them?
As a financial education company, we conduct classes to teach people how to invest properly with the right knowledge and strategy.
Occasionally we hear from the attendees’ that they think a 15% return is too little. Often, they also think that a 3-5 year investment time frame is a tad too long.
Obviously, they are out of sync with reality. They crave for 100% return within a few months, as if the market will obey them and give them what they wish for.
Investing in stocks isn’t a get-rich-quick scheme. A lot of things are not within your control. You can’t determine when is the market going to reward you with profits. Be prepared to hold on to your stocks for a few years.
So, after knowing these 3 signs, do you still think you are suitable to invest in the stock market? If you are not afraid to lose money, have at least $5,000, and with realistic expectation, then you should go ahead. Not sure how to start? We will teach you at our Value Investing Mastery Course.