Have you always wanted to invest in stocks for your retirement but don’t know how to start?
If investing for retirement feels daunting, scary, and complicated, I would like to assure you that it’s not. It’s true that there’s a lot of financial jargon you might never have heard of before but this shouldn’t deter you from starting small and slowly building up your financial knowledge.
Maybe you never started because all this financial mumbo-jumbo gives you a headache or puts you to sleep. That’s perfectly fine because that’s why there are financial advisors (which I’m not) and now with advancements in technology, there are robo-advisors too.
It’s now easier than ever to get started on retirement investing but many are still sitting on the sidelines – some paralysed by fear of market uncertainties, fear of losing money, and maybe even analysis paralysis.
As with almost anything you’re trying to learn, the trick is to start small but dream big. The big dream is to be able to have a comfortable (and maybe even early) retirement, or even semi-retirement where we can work because we want to, not because we have to.
As for the start small part, there are index funds and robo-advisors now that offer you easy access to a diverse portfolio of assets even with a small amount of capital.
Why can’t you stick with safe assets like cash, fixed deposits, or bonds? You probably may have inkling of the answer and have felt it more acutely these past couple of years – INFLATION. For every single asset including cash, returns have to be offset against inflation, what we call REAL returns. See one of my favourite charts below to illustrate this. Basically the chart shows how much you would have if you held $1 of the various assets shown since 1802 until 2021.
As you can probably tell, although gold has had a recent strong run because of wars breaking out, over a long period of time, gold actually performs very poorly. Bonds and bills did better but still lags WAYYYY behind stocks. Note that the y-axis is a logarithmic scale (every step is multiplied by 10x). The worst you could do is hold cash (represented by the dollar) which would have gotten you negative returns.
If you’re still unconvinced, maybe you can consider at least putting some money to work, monitoring how the market (and your response) works, and learning along the way. After all, there is no better way to learn than by doing. Of course, not risking all your savings at once.
Here are 6 steps you can consider taking to kick off your investing journey (not financial advice):
- Determine a percentage of your monthly salary you can put aside every month for long-term investments.
- Research and pick a broad index fund you want to invest in.
- Research and pick a broker or robo-advisor for access to markets.
- Mentally prepare yourself for the inevitable volatility of the market.
- Bite the bullet and execute your plan.
- Continuously improve your investment strategy.
#1 – Monthly Investments
Consistency is key in investing and passive is the way to go for newbies. If you’re drawing a regular monthly salary, the battle is half won. You just need to figure out how much in terms of percentage of your monthly pay you can comfortably set aside for investments without affecting your cash flow for expenses.
Of course, the comfort level would depend on each individual’s circumstances so I can’t quote you a figure but online wisdom usually suggests 10-20% of gross monthly salary (or household income for families). No hard and fast rule. As a start, I would say even 5% is good especially for families with many existing financial commitments. Once you start, you can gradually build up to 10% and maybe even 20% or more.
As a side note, do also consider establishing a cash emergency fund so that you won’t be forced to liquidate your investments in the event that you need cash on short notice.
#2 – Broad Index Fund
Now that you have set aside some money every month to invest, don’t go off like a scattergun buying every hot stock in the news or on Reddit threads. Take your time to research into broad indexes, e.g. S&P 500, Nasdaq, FTSE World, MSCI ACWI, STI. Typically, the most popular index funds track one of these indexes.
In simple terms, the index is a theoretical basket of stocks, bonds or whatever asset under the sun, and the index fund is the actual product formed by financial institutions that you can buy to try to track the index as closely as possible. There will always be some error because of fund fees, timing of trades, etc.
If you truly tried your best but can’t muster the strength to read through an index or fund factsheet, stick to the established indexes like S&P 500 or FTSE World index. S&P 500 index because it tracks the largest companies in the U.S., which has by far the largest stock market in the world. FTSE World index, well, because it tracks almost the whole universe of stocks available in the world (though not every country might be included).
#3 – Broker or Robo-Advisor
Now that you’ve picked your asset of choice, the next step is to actually process your purchases through either a broker or robo-advisor (financial advisor also possible but usually very costly).
Here’s where things can get a little bit more complex. Picking the right broker or robo-advisor involves evaluating their fees, which markets they can access, how stable and trustworthy they are, whether or not they are regulated by local regulators, etc. If you already have an index fund in mind from the previous step that would help somewhat in picking one.
Without going into too much details, the gist is that brokers are more DIY thus a better pick if you want to manually execute your trades. Yes, most of the discount or neo brokers now offer regular savings plan (RSP) as well which are basically automated monthly investments but their unique selling point are usually super low fees and even fractional shares investing.
However, if you’re a newbie it might be a better idea to pay a little more in fees with a robo-advisor to gain maximum exposure for minimal work or supervision. Robo-advisors offer curated portfolios of funds that are professionally managed (probably partially run by AI) and automated recurring investments once set up.
In Singapore, robo-advisors like Endowus, Syfe or StashAway are great choices for your first foray into investing. As you gain experience and mature as an investor, you might crave for more customisation and thus move towards brokers but that can always come later.
#4 – Mental Preparation
Before you put your first dollar to work in the stock market, it’s very crucial that you prepare yourself mentally for a the shit storm that is the world of humans. Humans are imperfect and having billions of them living on Earth together calls for a whole lot of messiness and uncertainty, even if only a fraction participate in the stock market.
You can read and study up all the most wonderful economic or market theory from the most brilliant professors or hedge fund managers but nothing prepares you for the whims and fancies of the stock market like having real skin in the game, ie. putting in your very own hard-earned money (and watching your portfolio tank).
You just need to go in with eyes wide open, that stocks will go up and DOWN. You will be losing money sometimes and hopefully making money most of the other times. In the long run however, a diversified basket of the largest stocks in the world have a very high chance of giving you a positive return that beats inflation (conservatively). The worst thing you can do to destroy your portfolio is to panic-sell when the market crashes.
#5 – Execution
Once you’ve psyched yourself up to face whatever financial tsunami that might come your way, it’s time to bite the bullet and take the plunge with your first investment. Start with a small amount that you won’t mind getting cut in half or losing it all even.
By getting your feet wet, you can start to experience how it feels like to lose real money and better understand your emotional responses to market volatility. Being able to handle what the market can throw at you without blinking an eye off your plan is the ultimate goal.
At this stage, set up your bank accounts such that investments can be automatically debited from those accounts with as little intervention as possible from your part. I find automating bank transfers and fund purchases really goes a long way in keeping a consistent investing plan going.
#6 – Continuous Improvement
Once you have these basics set up and all automated, and if you have the interest and wherewithal to go deeper into investing, you can start to get a bit fancier in your investing strategy. You can look into many ways to optimise your portfolio, including minimising fees and taxes, diversifying further into different types of funds or even individual stocks, and maybe even pseudo-timing the market for fun.
Important though, that you start experimenting different strategies with a smaller part of your portfolio, maybe 5-10%. As your confidence (and returns) grows, you can consider expanding your bespoke strategy to a larger proportion of your portfolio.
Start Small, Dream Big
In essence, the whole idea is to start by building a strong foundation of index funds bit by bit. As you progress, you can then build on top of that foundation with other more sophisticated strategies should you choose to.
All this might seem slow and boring, but keep at the back of your mind the big dream of securing your retirement which cannot be rushed. So shoot for the moon in terms of your long term investing for retirement but also recognise that Rome was not built in a day and it takes time to build a solid portfolio to last you a lifetime.