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I previously wrote an article regarding some of the common misconceptions and reasons why beginners are not investing here. You can check out Part 1 first before continuing this article!
As a newbie investor, other than the 3 common reasons highlighted in Part 1, these are a 2 more reasons why beginners are not investing even though it is so important to invest from an early age.
Reason 1: Lack of Exposure to Financial Literacy
Personal Finance and Investing are extremely important life skills to acquire because firstly, they are lifelong skills that sticks with you for life and secondly, with good money management skills you will be able to control your money, instead of letting money control you.
We spend the past 20 years in school not learning a thing about investing but instead cramming our heads with equations, excessive scientific knowledge that are not practical in real life etc rather than learning how to practice good personal finance habits or investing principles.
Upon graduation, students then come out to the work force and assume that investing is risky but what they don’t realise is that investing is the answer to financial freedom and by not investing, you will actually be stuck in the rat race till age 65 (or more).
Every 10 years you delay to invest, you are incurring an unimaginable amount of opportunity cost in the process. This is a point that has been reiterated over and over again and that is because it’s a fact and if you still refuse to start, you are only shortchanging yourself and no one else.
Financial literacy is gaining more awareness in my generation, with more and more people understanding the difference between gambling and investing and understanding the importance of investing early so as to reap a bigger compounded return.
Understanding how to budget is also extremely important, and one should understand the difference between Investment, Savings and Protection because in order to start investing, you need a good foundation of savings and protection covered before you can move on to generate wealth.
Many people avoid topics when it comes to protection because Insurance is seen as a taboo and often seen in a negative light especially in an Asian society like Singapore. In fact, most Singaporeans are actually under-insured based on statistics. One should understand that insurance is an essential portion when it comes to your overall wealth as it ensures that you have your risk covered. You must understand that by paying the right insurance payments based on your needs, you are essentially paying pennies for dollars should God forbid anything happen.
Usually when something bad already happens, it is already too late to start regretting. So before the storm comes, get yourself an umbrella so that you are covered during a thunderstorm.
Aside from Protection needs, it is recommended to have at least 6 months worth of salary saved up as Emergency Savings in case of retrenchment like the situation we have right now (Covid-19). This emergency fund is used to provide at least 6 months worth of your income while you look for a new job, and at least ensures a buffer or lifeline before you have a constant active income again.
A common misconception about emergency savings is that it is used in an unfortunate event like a major accident or severe illness. What many people don’t realise is that this risk can actually be transferred. How so?
- Major accident –> Transfer risk by buying a Personal Accident Insurance Plan
- Severe Illness –> Transfer risk by buying a Critical Illness Insurance Plan
- Hospital Bills –> Transfer risk by buying a Hospitalisation Plan
To grasp this concept may not be easy, because of the pre-existing assumption that insurance is bad and even a “scam” based on previous generation’s experiences and past conditioning. So my question to you is: Would you rather pay for these unfortunate events (should they happen) yourself or transfer this burden to someone else? The answer is for you to decide.
Once you understand the clear difference and purpose between an Emergency Savings Fund and money set out for protection needs, you can now use the spare money that you have to invest!
*Figure out if you have your 6 months emergency fund set up and enough insurance protection, then you can talk about investing (or growing your wealth).
Reason 2: Not knowing how much to invest (as a result of knowledge gap)
“How much do people invest ah?”, “Investing need like 1 million or something right?”, “He must be rich, that’s why can invest.”
Does it sound familiar? If yes, you are a victim of reason number 2.
The concept about investing or building wealth in general, is that people who give an excuse and say “I will invest when I get more money“, ‘When I start working” or “When I get a pay raise” is simply ironic. It is equivalent to an obese person telling themselves “I will start exercising when I lose 20 pounds.“
Investing is not a good-to-do but instead, a must-do because it allows your hard earned money to work harder for you rather than staying idle in the bank collecting dust. In order to build wealth, you have to invest because doing so will speed up your wealth building process, allowing you to capitalise on compound interest based on the amount of time you spend doing this.
All of us only have 24-hours a day, regardless of you being an Engineer, Billionaire, Housewife or Student. We have a limited amount of time to work and get paid based on our active income. Without investing, you are just relying on your active income which is in fact capped by a time limit.
In fact, by investing your hard earned income, you are actually duplicating your effort spent at work since you are allowing your hard earned money to work even harder. How is this so?
By investing into stocks, you are investing into an underlying business filled with employees and these employees will try their hardest to generate extra returns for your money even while you sleep. Think of it like outsourcing your effort so instead of just having 24 hours per day, you are able to outsource many more “24-hours” to businesses through the owning of stocks which will in return work harder for your money.
Of course, returns will not be seen immediately so it is important to have long time horizon. This is why starting as early as possible is so important when it comes to building wealth through investing in the stock market.
If you are a working professional and have more upfront capital, and have the comfort and luxury of time to invest, you can start your DIY portfolio by buying into ETFs which are automatically diversified in nature. If you can spend the time to research about individual companies, you can also go ahead and buy into individual stocks and it is generally recommended to at least pump $5000 or more per stock so as to minimise trade commissions as much as possible. (For SG stocks)
Likewise, you can also use Robo-Advisors if you really don’t have the time due to your work schedule and commitments. The important part is to start investing as early as possible. Once you’re done with this article, go and open an account now and just start immediately!! (if you have not done so)
To sum it all up, why the average person have not started investing is because:
- Lack of exposure to Financial Literacy
- Not knowing how much to invest
By re-conditioning your brain and understanding that investing is not something risky, as your own investing style and portfolio is based on your own personality, risk profile and time horizon.
What works for me may not work for you, just like every different individual, everyone is unique and so does your investments. So the next time you go online asking for other people’s opinion on what to invest in or to justify your investments ,ask yourself these questions first:
- What is my time horizon?
- So now with this time horizon, how much risk can I take?
- With this amount of risk, how do I allocate my capital to maximise returns?
Once you answer these questions, stick to a disciplined, repeatable process and create your own investing principle. The goal here is really consistency and not to be a trend-follower. Avoid market noises and avoid the next big thing. Stick to your original reason why you started and follow-through with it. With enough time and capital, you will only have everything to gain and very little to lose.
Thank you for reading to the end and I really hope you feel more confident to start if you are a beginner and also provide clarity if you are already investing but unsure of what you are doing. If you like this article, do share it among your friends so it can help more people and to re-condition our minds to think like an investor and hopefully retire early by cultivating a healthy personal finance habit and staying invested for the long run.
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