It doesn’t matter if it was 10,000 worth of British Pounds, Euros, US Dollars, Singapore Dollars or denomination of the similar amount, it seems like the right number to give the individual a confidence push to invest and grow further money. MooMooCoo would also like to congratulate you on saving this amount money of a significant amount which could be the first step to your financial freedom.
For the past two months after the release of my ‘First 6 steps Guide to investment’, many readers have asked exactly how would they deploy their investable money. I called it the practical gentle push!
1. Preliminary checks
1a. Quick Check
Is your 10k an investable money? If this was all the savings you have, then stop considering this is an investment. Why? If you lose this cash and your job you will struggle to make ends meet. Depending on your age, you need to make sure you have enough funds to cover if you do lose your job. You need at least 3-6 months expenses savings to give you time to find a new job.
Remember this is not a gamble but an investment. An Investment needs time and long-term goals to achieve its final compound interest objective.
Do Not Invest this money until you have sufficient savings!
1b. Plans before Execution
Yes, planning is crucial. A single 10k investment will not grow you anything much. You need to feed your investment regularly to ensure you get the maximum outcome. You need to set a target amount, time available, future investable savings, risk on return and also a long-term view.
Investing 10k over ten years with a 3% dividends with 10% yearly yield will only triple the amount.
Alternatively, you could invest 10k initially, 3% dividends, 10% yield WITH an additional top-up of 2.5k yearly will output you 8 times the amount. Just simple basic maths.
2a. First 6k investment.
You must admit that you have limited experience. Do not expect to start stock picking and find an instant winner. You need to be in the investment game and stay in the game to maximise the benefit. Many new investors, pulls out after a 10-20% drop in their initial investment in less than a year. Anxiety, lack of sleep, disturbance from media noise can always distract you and leave the game early. You are investing in a company and you need to walk the journey with the company.
Honestly, 10k will not build you much of a diversified portfolio. Even if you spread very thin (1k each share) you will be eaten by the broker fees and takes years before you break even. I would strongly recommend putting at least half the amount into index funds. This way you will have an instantly diversified portfolio with a strong base. The risk of fluctuation and volatility will be suppressed. Remember you can still top this up on a monthly basis with small amount without paying any upfront fees. Index tracker and funds normally charge less than 0.5% on an annual basis. You can always pick the following:-
- S&P 500
- FTSE 100
- FTSE 250
- Dow Jones Index
- Nikkie Index
- Emerging market index
- Technology and communication index
- Your Local region index
Try to diversify your geographical region of investment. For example, do not go in FTSE 100 and FTSE250 at the same time, if the British economy hits the bumpy road then both will follow suit at the same time.
2b. Next 4k investment
Take your time before investing your next half. By Morning Star’s research, you should deploy the money in less than 12 months. This means you do not have to deploy it immediately and you can watch a selection of stocks or manager funds before investing the final amount. Try to consider the following:-
- Buy good quality company stocks
- Buy a stock which you re familiar with
- Do not buy penny stocks
- Do not invest in an injured company with high debt
- Make your own research and discuss with peers of the same knowledge and experience
- Do not buy companies with more than 10% dividends
- Do not buy and sell too often
MooMooCoo has located a few good quality companies to consider as of December 2017.
3. Top-Up & 4. Benchmark
3a. Monthly Direct Debit into investment savings
As mentioned in point 2, you need to save more for investments in the future. You could potentially direct debit and automatically top up your index (point 3). The reason for this is because buying index funds has no upfront fees. No difference in $50 or $200 a month you will still be charged the same annual fees on the overall index value.
You can grow these investable savings and deploy on future shares. Make sure you invest more than $2,000 per share so you don’t pay too many fees to the broker. Always buy a share at a good discounted price during corrections. This way you get good cheap value shares.
3b. Monitor and plan your diversification of your portfolio
Try to avoid too many buying and selling at this stage because your portfolio might be still very young and undiversified. There are many ways to diversify but you need adequate funds available to purchase a good portion to ensure your portfolio is balanced.
Do not bias your portfolio with heavy commodities or too many growth stocks or highly reliant on dividends or smaller caps shares.
4. Monitoring and Benchmarking
With a planned diversified portfolio you can actually leave it running as a passive growth income. Not much attention is needed but a regular monitoring once every quarterly would be smart. Just need to ensure that the invested companies are still as planned for long term.
Benchmarking is important but will not be relevant after 24 months. As a rule of thumb, it is always useful to benchmark against the key global index such as FTSE, Nikkie, Dow Jones or S&P 500. If you find your portfolio lagging behind the index that means you have bought very poor stocks which are severely underperforming. Benchmarking against an index always helps to understand if you stock-picking skills are right.
If you find yourself under performing, then you should just focus on buying more index funds. Not everyone has a good knack for stock picking. This investment portfolio is meant to be a passive income generation and if you spend too much time monitoring and tweaking you will lose focus on your day job and your time after work.
Another good point with benchmarking is to put your portfolio in perspective. For example, your current financial year may be a downward bearish market in the negative zone. If you are still above the index that means your portfolio is actually doing positively well.