Finance Smiths

Personal finance apprentices-in-training

Why are you investing?

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Sitting inside the Parkway East Hospital at Telok Kurau now accompanying my wife for her executive health screening appointment. It’s a good thing this is covered by her employer. Just saw the costs and it would have come up to about S$500. One of the benefits of being employed that we don’t appreciate enough – the fact that our medical costs can be covered in such a manner already help to alleviate our living costs in Singapore. Since I will be here at the hospital for a while, I might as well write something on this blog.

Remember the series I started about the things I wished we knew when we first started investing? There’s already been 3 posts if you are interested to have a read from the beginning:

This post will be about a fundamental question that any new investor should ask himself – Why are you investing? It’s not an easy one to answer as you move through the different phases of your life and your needs & wants change. But it’s important that you consider it at the time and phase you are about to start investing. It will influence the financial goals you set and shape the entry & exit investing approach & strategy to meet those goals. Let’s start with some questions that we asked ourselves over the past several years to help us with this.

How long are you planning to have a job and work full-time?

Full-time jobs in most sectors and industries have become more demanding and stressful. Look around you and the reasons are not difficult to spot:

  • Technological advances with email, mobile, laptop, applications, etc have blurred the lines between work and personal life
  • Higher service & turnaround expectations from internal & external stakeholders & clients
  • Stagnating wages but increased workload as firms try to reduce costs
  • Shorter job lifecyles and constantly changing job environments

In addition, living costs have gone up and it’s becoming increasingly difficult to sustain yourself just on salary income. Which results in you possibly taking another part-time job to supplement your income. This combination of factors means a greater likelihood of you burning out at a younger age. I’m seeing more of my peers and juniors taking sabbaticals despite all of us only working for less than 10 years. But I have noticed a strong push towards self-employment and entrepreneurship because of it. Not a bad outcome.

Ask yourself this no matter how many days, months and years you have spent at your full-time job. How long do you plan to continue with it? It’s different for everyone. Take my sister as an example. She works as a teacher and plan to do that for the foreseeable future. Her pay is decent but is not expected to increase significantly unless she takes on leadership roles. But she’s okay with that. So her reason for investing is to supplement her salary income for now and build a late retirement portfolio for when she eventually stops working. Plus my sister manages her expenses much better than me.

This impacts the selection of financial assets she will invest in and her investing approach & strategy. Doesn’t need to take significant risks with her capital as she is not looking to grow her investment portfolio exponentially. Also doesn’t need to go into high yield dividend stocks since her salary income is relatively stable.

As you can see, my sister’s investor profile is different from us. Our pay is higher but more unstable. And we have plans to stop working full-time 10 years later so our investment portfolio has a shorter time horizon to grow but will need to generate more income. Plus it becomes more of an early retirement portfolio. Hence, we take more risks with our capital and selection of financial assets.

Are you investing for capital gain or income?

My dad and I went for one of those investing seminars together a long time ago. We got asked this question – Are you investing for capital gain or income? My dad’s reply was capital gain and mine was income. He was looking to double or triple his portfolio from capital gains while I was looking for my portfolio to generate sustainable income every month. Goes to show how your investment aims can differ right from the onset and have a significant impact on the returns you generate.

I remembered that incident and question vividly because that was right before my dad made the disastrous venture into FX trading. Come to think of it. It probably happened 7 years ago in my final year at university. He ended up losing his investment capital within the span of a few months and swore off investing in financial assets after that. I went on to build an investment portfolio whereby both the capital and income are growing slowly but surely.

Maybe it was because he was at the tail end of his career and was looking for a quick way to grow his retirement portfolio. While I was at the beginning and took a long-term view to my portfolio. Either way, think about your investment aims carefully. Be realistic, cautious and don’t over-estimate your ability to achieve it.

How much time do you have to invest?

As my wife and I get busier with work, we try to balance it with our personal and family commitments. But it’s a never ending struggle to make as many things as you can work. Since we have plans to start our own family and have kids, I can imagine this to become even more challenging. And you know what we realised. Time, not money or anything else, is our most precious commodity.

We have a limited currency of this commodity to spend everyday and we use most of it on dealing with everyone around us. We end up having so little of it to spend on ourselves. How do you expect us to dedicate our time to become good at investing when we are so busy trying to be better versions of ourselves in every other way.

Which is why we automate our investing and will be using robo-advisors. There are so many other things we would rather focus on than to let our time be consumed by reading, researching & analysing financial news, updates and reports. That’s not to say this is not important but it’s just not our priority for now. So the question is – How much time do you have?

Comments

  1. Nice post and I do agree that the investment strategies employed if one were to invest for capital gains or income. Personally I tend to think that the risks for the former tend to be slightly higher than the latter. Unfortunately, this blur line of different is something that many failed to understand before jumping on the investing wagon.

    • Thanks! Yup, it’s important to work out the investing approach with a focus on capital gains, income or both at the beginning. I was one of those that jumped on the investing wagon before figuring this out and it has had a negative impact on the way my portfolio has been built.

  2. ‘ many failed to understand…..’

    I m afraid it is not about understanding. It is sheer greed. Everyone knows it.

    Fred