Three Fund Portfolio – For Lazy Singaporeans

For those who have been following my website for a while, you will know that I am a huge proponent of passive investing. This strategy involves buying and holding ETFs that track a broad index. The philosophy behind this strategy is encapsulated in this quote from John Bogle, the founding father of modern day index funds: “don’t look for the needle in the haystack, just buy the haystack!”. In today’s complex and uncertain world, keeping our investment strategy simple is perhaps one of the wisest things we can do.

Proponents of this method of investing, known as “bogle heads”, have popularised a three fund portfolio that is inspired by John Bogle’s simple and low cost investing strategy. Typically, a three fund portfolio consists of the following:

  1. U.S Stocks
  2. International Stocks
  3. Bonds

However, given that this portfolio was created with the U.S. context in mind, I have adapted the three fund portfolio to suit my personal goals and preferences and Singapore’s unique context (many blue-chip stocks and REITs, no withholding taxes on dividends and the CPF system).

Here is an outline of the three fund portfolio adapted for Singaporeans.

1. An ETF that tracks a broad index

When it comes to passive investing, there is a plethora of ETFs to choose from. For starters, choose which index you would like to track. For instance, there is the S&P 500 index, the total U.S. stock market, the Russell 1000 index, world indices, etc.

If you would like to invest exclusively in the United States, your choice will be between the S&P500 index, the total U.S. stock market and the Russell 1000 index. From here, it will depend on whether you would like some exposure to small and mid cap stocks. If you do, pick the total U.S. stock market fund. Else, the S&P500 and Russell 1000 index are fine as well.

If you believe that the other markets could provide greater returns than the United States in the years to come, I would suggest opting for an ETF that tracks a world index. These indices typically have about 60% allocation to the United States and a 40% exposure to the rest of the world, providing adequate diversification away from the United States.

The ETFs I picked for my own portfolio are CSPX, which tracks the S&P500 Index and VWRA, which tracks the FTSE All-World Index. Both of these ETFs are Irish-domiciled ETFs, which are more tax efficient for Singaporeans compared to their US-domiciled counterparts. Additionally, they are of the accumulating type as I would like to maximise the compounding effect while minimising costs. For more information on Irish-domiciled ETFs and how to choose one that suits your preferences and goals, check out my article here.

For investors who only wish to pick one ETF, I would go with VWRA because it provides greater diversification and exposure to emerging markets such as China as well.

2. Singapore Dividend Stocks

One of the advantages of investing in Singapore is that there are many high dividend yielding stocks (blue-chip stocks and REITs) and no taxes on dividends. This is why so many Singaporeans are obsessed with dividends (myself included). While dividend stocks may not produce spectacular capital gains compared to high growth companies in the United States, I would argue that there is still a place in our portfolio for them. In investing, we should not seek to maximise our returns but instead seek to build a resilient portfolio that generates adequate returns. These dividend stocks are typically more stable and continue to pay dividends during times of economic downturn (albeit less). A steady stream of dividend income is extremely desirable as it can help tide us over a crisis or challenging period. The Covid-19 Pandemic is the perhaps the perfect example to substantiate my point.

In terms of dividend stocks in Singapore, there are two main ETFs to consider.

  1. SPDR STI ETF (Ticker: ES3)
  2. Lion Phillip S-REIT ETF (CLR)

As I am not a fan of the Straits Times Index (STI), I invest directly into the banks (OCBC, DBS and UOB) instead (mainly because they have higher yields than the STI and tend to perform better). If you would like to stick with the most passive form of investing, dollar cost averaging into the STI is fine as well.

Additionally, the S-REIT ETF is an excellent ETF to include in your portfolio. It boasts a higher dividend yield than the STI and Singapore’s vibrant REIT market is definitely something that we should take advantage of. Read my article on REITs to find out why I think they remain a worthy investment today.

At this point, some of you might say that my portfolio has more than three funds and deviates from the most passive form of investing (buy and hold ETFs). However, I would argue that the additional work required to invest in the banks and the S-REIT ETF is minimal and well worth it. Furthermore, no harm in having greater diversification! That being said, there is nothing wrong if you wish to stick with only three funds, just pick either ETF (STI or S-REIT) and stick with it.

3. CPF

Lastly, I have opted to replace bonds with the retirement system that Singaporeans have a love-hate relationship with. Despite the limitations of CPF, namely not being able to receive any pay outs until much later in life, CPF has “bond-like” characteristics that makes it a suitable replacement. Let me explain my thesis.

Firstly, I have an extremely long term horizon as I am investing for retirement. Thus, the fact that I am not able to touch my CPF money does not bother me as I have the intention of leaving the money in there for as long as I can. Of course, there is a chance that I will need cash urgently (due to a recession or emergencies). This makes the case of first having an adequate emergency fund.

Next, CPF provides a 4% rate of return that is essentially risk free (as it is guaranteed by the Singapore government which is rated triple A, the highest possible credit rating). This is much in excess of any triple A rated bond in the world.

Essentially, the CPF system makes it a bond on steroids that can give us steady, guaranteed pay outs well into our retirement as long as the Singapore government does not default. Given our government’s history of prudence and huge reserve, this is extremely unlikely.

Even if you are intending to pursue FIRE, CPF can be your safety net, allowing you to still achieve an adequate retirement in the event that your FIRE plan falls through.

Either way, we are forced to make monthly CPF contributions from our salary, which should be form quite a substantial part of our portfolio. However, if you want to allocate a larger portion of your portfolio to CPF, you can make voluntary contributions which can lower your taxable income as well.

That being said, I would like to add a caveat that I am mainly investing for retirement. The CPF system should only be seen as a replacement to bonds if you have an extremely long term horizon. If you are intending to take money out to make a big ticket purchase, consider having greater allocation to stocks and actual bonds.

Thus, a Singapore three fund portfolio will look something like this:

  1. VWRA
  3. CPF

Finally, we come to portfolio allocation.

Below are rough guidelines I intend to use to portion my portfolio at different stages of my life. Do note that these just rough numbers and are subjected to change depending on numerous factors.

In my 20s, I intend to be aggressive as I wish to attain financial independence as early as possible. Thus, I have a huge allocation to U.S. and international stocks (VWRA and CSPX). I also have a small allocation to Singapore REITs and blue-chips (namely the bank stocks), which I picked up last year when they were at huge discounts. Finally, my CPF makes up less than 10% of my portfolio as I am not working yet. Currently, my portfolio looks something like this:

US + Rest of the world: >70%

Blue-chips and REITs: 20%

CPF: <10%

For the next 5-10 years, my portfolio will likely look similar in terms of allocation. I intend to continue to DCA monthly into CSPX/VWRA, only adding to Singapore REITs and blue-chips if they are selling at huge discounts.

In my 30s-40s, CPF as a percentage of my portfolio will likely increase substantially due to mandatory and voluntary contributions. At the same time, I will start to allocate more money to dividend stocks and cut back on growth stocks in order to start building a dividend income in order to achieve financial independence. My portfolio will likely look something like this:

US + Rest of the world: 40-50%

Blue-chip and REITs: 30-40%

CPF: 20%

In my 50s and beyond, I will hopefully have achieved financial independence. I intend to do this by having the bulk of my investments in dividend paying stocks. This will allow me to have a steady stream of dividends to fund my desired lifestyle. However, I will still be allocating some money to growth stocks so that my portfolio will still achieve desirable rate of return.

US + Rest of the world: 10%

Blue-chips + REITs: 60%

CPF: 30%

As with most other things in life, there are no hard and fast rules in investing. What may work for someone else may not work for you. I adapt ideas from other successful investors, copying what I deem fit and omitting the rest. In fact, my own plans, preferences and goals may be subjected to change and so will my portfolio allocation as well. The key is to remain flexible in order to create a resilient portfolio that works for you.

Three Lessons From “Thinking Fast And Slow”

Many often associate rational thinking with investing. However, cognitive biases are in fact widespread amongst investors, limiting their ability to make the optimal decisions. In this article, I share three lessons from Daniel Kahneman’s “Thinking Fast and Slow” that we investors can learn from.

1. The Illusion of Understanding

In his book, Kahneman explains that we humans are prone to suffering from the illusion of understanding. The core of this is that we THINK we understand the past and therefore, can foresee the future. When in fact, we actually understand less than what we think and discount the role of other factors such as luck. In hindsight, we can all agree that Google was a sure success. Two computer science students from Stanford creating a superior search engine. Yet, the founders wanted to sell Google for 1 million at some point, only for the buyer to decline the offer because they think the price was too high. The lesson here is that we should not place too much weight on predictions, especially if they were made by looking at the past. People often overestimate their ability to do things and this applies to analysts and economists as well. By studying how markets perform in history, they think that they can predict when the next crash can occur. In doing so, they fail to recognise that many things are in fact left to chance.

For instance, many analysts have been warning of a stock market bubble since last year. Yet, the S&P500 year-to-date gain is 22.8%. Had we suffered from the illusion of understanding and stayed out of the stock market, we would have incurred huge opportunity costs in terms of potential gains forgone. Thus, don’t let these noise affect your decision making and paralyze you.

There are many ways to manage your emotions. First, do not see whether to invest or not to invest as a binary decision. Think of it as a spectrum. If you think there is a chance that the market will crash soon but are not 100% sure (as no one can be), maybe start by investing 30% of your money you plan to invest and dollar cost average the rest over the coming months. Dollar cost averaging is an excellent method to remove emotion from the decision making process. By investing $200 every month like clockwork, your emotions will not get in the way of decision making.

2. Risk Policies

The next lesson is related to Risk Policies. Read the following and make a decision for BOTH i and ii.

Decision (i): choose between

A. Sure gain of $240

B. 25% chance to gain $1,000 and 75% chance to gain nothing

Decision (ii): choose between

C. sure loss of $750

D. 75% chance to lose $1,000 and 25% chance to lose nothing

When faced with the above two decisions, people tend to choose A for decision (i) and D for decision (ii). Instead, when you look at things from the broader perspective, you realise how irrational we are.

A and D: 25% chance to gain $240 and 75% chance to lose $760

B and C: 25% chance to gain $250 and 75% chance to lose $750

At the heart of this is that humans are naturally risk averse when dealing with gains and risk seeking when dealing with loses. The above experiment substantiates how this can lead to suboptimal outcomes.

The lesson for investors here is that looking at the bigger picture will allow you to make better decision for your portfolio. Do not view each investment individually. Instead, review your portfolio as a whole. No matter how much you know about each business, there is always a chance that things do not go according to plan. Therein lies the case for diversification. Even if there are multiple losers in your portfolio, all you need is one or two big winners to make a worthwhile return (as long as the loses are small and gains are larger). In value investing, we always seek for capital preservation. Which involves careful study of the company’s fundamentals in order to limit our downside. More on value investing philosophies here.

3. Mental Accounts

The third lesson is on mental accounting. Mental accounting refers to the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results. Essentially, we tend to compartmentalize things when making decisions and this often leads to suboptimal decisions being made. Consider the following thought experiment:

Imagine you require money to buy a house. And you own 2 stocks, one is a winner: currently worth more than what you paid. The other is a loser. Which will you sell?

Most investors will sell the winner and add a success to his record. This is because if he chose to sell the loser, he would add a failure to his record.

This is mistake that afflicts individual investors when they sell stocks from their portfolio. As Peter Lynch once said “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” The lesson here is that you should not sell your winners and keep your losers because you don’t want to realize loses. If the winning stock is still undervalued, you will be missing out on a lot of gains by selling it early. Likewise, the losing stock may remain a losing stock due to various reasons. You could have missed out something or the company fundamentals have deteriorated.

Of course, the caveat here is that there are some scenarios where you should sell your winners (when its price is irrationally high) and buy the losers (when the fall in price has nothing to do with its fundamentals). Thus, always fall back on the business fundamentals and not how the stock price has performed in the previous months.

These are merely three lessons for investors from “Thinking Fast and Slow” and is by no means exhaustive. In his book, Daniel Kahneman also tackles other heuristics and biases. It is a book filled with wisdom and countless lessons for life and more. It is a book I will definitely recommend to anyone who wants to learn more about the human mind and how decisions are made. If you are interested in learning more about investing, check out my other article on 7 Timeless Concepts From “The Intelligent Investor”.

5 Myths About The Stock Market

Maybe you’ve read my previous articles and are convinced that investing is a necessity. However, there are just a few things you have heard that are stopping you from taking that first step. This article seeks to debunk 5 myths about the stock market.

1. The professionals know better

Many think that we should leave investing to the “pros”. After all, they do this for a living, so they should know better. This thinking results in retail investors blindly follow financial advice or entrusting their life savings to fund managers. While there are indeed some financial advisors and fund managers who have our interest at heart, this line of thought is not always true for various reasons.

First, there is a conflict of interest as these advisors typically make money by selling us a financial product. Thus, they are inclined to sell us any product regardless of how good they actually are. This can be likened to asking a fruit seller if his fruits are fresh. There is a clear misalignment of interest.

Secondly, the people in the financial industry sometimes do not completely understand their products as well. Take the case of the global financial crisis for instance. Most investment bankers did not even understand the financial product they were selling due to the high degree of complexity.

The combination of a conflict of interest and poor regulatory oversight means that not everything financial “experts” say can be trusted. We must always do our own due diligence and follow up by doing more research. Have a healthy dose of skepticism, especially if the returns sound too good to be true. After all, no one else has our interest at heart more than ourselves.

Furthermore, according to a report, over 15 year periods, 90% of actively managed investment funds failed to beat the market. This means that simply dollar cost averaging monthly into an ETF tracking a broad based index beats 90% of the “professionals” that seek to beat the market. Still think the pros know better?

2. Retail investors are bound to lose money in the stock market

In our traditional Asian society, many amongst the older generation have negative impressions of investing. This is probably due to their experience during the dotcom bubble in 2000 and global financial crisis in 2007/2008, where periods of euphoria has resulted in many losing their life savings.

We have all heard many stories about people who have ruined their lives trying to make a quick buck through investing in the stock market. This makes the stock market seem like an obscure place where we retail investors are bound to lose money. In my opinion, this is one of the biggest misconception of the stock market as it merely tells half the story, painting a bias against the stock market in our minds. While it is indeed true that one can lose everything in the stock market, I would argue that this happens when people view the stock market as a mean to get rich quick, chasing high returns in short time periods and blindly following others.

A study found that using a one year time frame, the worst year experienced by the S&P500 delivered a return of -43% while the best year delivered a 61% return. As the time horizon increases from one year to 20 years, the likelihood of experiencing negative returns steadily decreases. Most notably, there is no 20 year period in which the market has produced negative returns. The worst 20 year period delivered an average annual return of 6.4%. This means that by adopting a long term outlook and staying invested in the stock market, we can enjoy the wealth creation by the stock market.

3. Investing in the stock market is akin to gambling

This is similar to the previous point. Some may compare investing to gambling, where one puts up money for a chance to win even more. This cannot be more misguided. While there are indeed some people who gamble on the stock market, proper investing requires skill, knowledge and the right temperament. It is because of these qualities of a successful investor that I find investing more like a job than gambling, where the house always wins.

The difference between investing and gambling is delineated by Benjamin Graham in The Intelligent Investor, where he defined investing as “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return”. Investing serves to protect our capital while providing a decent rate of return. Gambling, on the other hand, provides the possibility of a windfall but also a high chance of losing everything.

Based on the study cited in the point two, there is no 20 year period where the S&P500 produced negative returns. If investing were gambling, that seems like pretty good odds to me!

4. You need a lot of money to invest

Many often think that investing is for the rich as it is only worthwhile when you have a lot of money. This is because a 10% return on $10,000 is only $1,000 while a 10% return on $1,000,000 is $100,000. This is true but this line of thought discounts consistency and compound interest, two things that are key to successful investing. For instance, by investing $350 a month at 8% per annum, we will have more than a million dollars at the end of 40 years.

$350 is not an exorbitant amount of money that is out of reach of the layman. Yet, over a period of 40 years, it can completely change our lives. All we need is consistency, time and the right mindset.

The misconception here is that the stock market is a means to make people extremely rich, therefore one would need a lot of money to make even more money. Instead, we should adopt the view that the stock market is for protecting our money against inflation and to create long term wealth. Any little amount that we have and do not need for the foreseeable future is worth protecting and compounding.

5. You need in-depth financial knowledge to invest

When ask to picture what an investor does, many picture someone with three or four screens who spends his day analysing charts, graphs and statistical models. This impression makes it seem like one needs in-depth financial knowledge to begin investing. Furthermore, there are many jargons that simply put people off and make investing seem very technical and hard to understand. However, I would argue that these jargons are created for that very purpose, by those in the financial industry to give the general public the false impression that investing requires superior inside knowledge. This increases demand for their services. In my opinion, once you understand some basic investing principles and grasp your head around compound interest, you will find that investing is not as difficult as it seems.

Let me substantiate my argument with the story of Ronald Read. Read lead an extremely low key life. He fixed cars at a gas station for 25 years and swept floors for 18 years. He lived a frugal life, staying at the same two-bedroom house which he bought at the age of 38 for $12,000 for the rest of his life. When he died at age 92 in 2014, he made the headlines for having a net worth of $8 million dollars! This came as a shock to the world, including his friends. What is more shocking to many is that there is no secret behind it. He saved money and invested them into blue-chips and let compound interest do the work. He stayed the course and continued to do so no matter rain or shine.

The fact that someone with no financial background can amass such a huge amount of wealth is a testament to the potential of the stock market to create wealth for anyone with the right mindset.

All that being said, I have to caveat that these misconceptions are not entirely baseless. They each stem from one misunderstanding or another. What we need to have is a proper understanding of the stock market and how it works. From there, by adopting a proper mindset and sound principles, we can begin our journey to creating long term wealth for ourselves and loved ones. Want to learn about investing and the stock market? Click here to join The Dollar Sapling telegram channel!

Real Estate Investment Trusts (REITs)

The Singapore Stock Exchange hosts a vibrant ecosystem of Real Estate Investment Trusts (REITs). From homegrown names such as CapitaLand to foreign REITs such as Manulife US, there is a plethora of REITs for us to pick from. In this article, I will cover the basics of REITs and what makes them a great investment vehicle for building long term wealth.

What are REITs?

REITs, or Real Estate Investment Trusts are companies that own income-producing real estate across a range of property sectors. The shares of such REITs are traded on stock exchanges just like those of a typical business, giving the shareholders a right to a small portion of the rental income the REITs collect from renting out their properties.

REITs structure

Before investing in REITs, it is essential that you understand the typical process of how a REIT operates in Singapore.

  1. Unitholders and REIT sponsor come out with initial capital
  2. REIT manager is employed to manage the group of properties
  3. REIT manager receive fee for its asset management service
  4. Capital employed to acquire income-producing properties
  5. REIT manager hires team of property managers to run day-to-day operations
  6. Property managers receive fee for services provided
  7. Net property income is deposited in trustee’s account
  8. A trustee is employed to safeguard unitholders’ interests. Trustee only release funds when property deeds are properly accounted for and verified
  9. Trustee earns fee for services provided
  10. Unitholders (you and I) receive income distributions every 3 or 6 months

For a more detailed explanation of how REITs in Singapore work, read this article.

Reasons you should invest in REITs

1. Allow retail investors to take part in the wealth creation by the real estate sector

Of the 10 richest people in Singapore, 5 of them derived their wealth partially or wholly from real estate. This is a testimony to the wealth that the real estate sector can create. While investing in REITs will not make us a millionaire overnight, it allows us to take part in the wealth creation of real estate. This is because REITs make investing in real estate affordable and accessible to retail investors. Few people will be able to fork out millions to invest in real estate but REITs will allow us to gain exposure to real estate investments with only a few hundred dollars.

Granted, past performance does not guarantee future performance. However, there are many factors that point towards a buoyant real estate sector in the years to come. First, Singapore’s land is scarce, limiting the supply of real estate. Additionally, as a politically stable country with a business friendly government and high skilled workforce, Singapore remains an attractive location for many businesses to set up their operations. Thus, Singapore continues to enjoy strong demand for real estate. These factors exert an upward pressure on rental and property prices. With many multinational corporations looking to enter the ASEAN market and the rise of high tech manufacturing, Singapore’s real estate sector will likely continue to enjoy tailwinds for the foreseeable future.

2. Pays good dividends

REITs in Singapore are required to distribute 90% of their taxable income to unitholders to qualify for tax transparency treatment. Under this treatment, the REITs are not taxed on income distributed to shareholders. Essentially, this regulation encourages REITs to pay higher dividends. This is why REITs have such high dividend yields compared to other blue chip companies. For instance, S-REITs (Singapore REITs) average a dividend yield of 5.6% in April 2021. This is very impressive compared to the 3-4% dividend yield of the Straits Times Index, which tracks the 30 largest public listed companies in Singapore.

Furthermore, unlike the United States which levies a 30% withholding tax on dividends for non-residents, Singapore does not tax dividends. This means that what we see is what we get. The dividend paid by REITs go straight into our pockets!

3. Provides diversification away from stocks

The third reason to include REITs in your portfolio is that it provides some diversification away from stocks. Despite their slight correlation, a mixture of REITs and stocks will make your portfolio less volatile (as observed from the graph below).

Some may argue that REITs do not provide sufficient diversification away from stocks due to their correlation, citing the example where both stocks and REITs alike suffered greatly during the 2009 financial crisis. However, this observation fails to take into account the underlying reasons of the 2009 financial crisis. The 2009 subprime mortgage crisis stems from the real estate bubble and was one that affected the entire world economy. Thus, it is to be expected that both stocks and REITs will be similarly impacted. On the other hand, in instances such as dotcom crash in 2000, stocks suffered greatly while REITs continued to deliver solid returns. This is because the dotcom bubble was mainly confined to technology stocks. In cases such as this, REITs do serve as an adequate diversification away from stocks. For additional reading on the correlation between REITs and stocks, check out this article.

4. REITs are relatively stable

The stability of REITs can be attributed to the stringent regulation implemented by the Monetary Authority of Singapore. One of which, is the maximum gearing ratio (debt-to-equity) of REITs. In essence, this regulation limits the amount of debt REITs can take. In light of the Covid-19 Pandemic, the Monetary Authority of Singapore raised the gearing ratio limit for REITs from 45% to 50%, giving REITs more leeway to take on more debt in these trying times. If you think about the ongoing Evergrande saga, excessive debt will make a company more risky.

Additionally, there are many more intricate details of the regulation of REITs in Singapore. These regulations are outlined by MAS and can be found here. In my opinion, these regulations are very desirable as they make the REIT environment in Singapore controlled one. This protects retail investors (you and me), making REITs relatively stable investments for investors seeking passive income.

Limitations of REITs

  1. Securitization of REITs resulted in them behaving like stocks

Much like stocks, REITs are traded on a stock exchange and volatility. This is unlike traditional real estate, which have relatively more stable prices.

  1. May not experience that much growth

This is because majority of earnings are paid out as dividends and are thus not reinvested to achieve more growth.

That being said, I would not see these as disadvantages or risks of REITs. The two points above come as a trade-off, something like a necessary evil for us to take part in the real estate investment and enjoy the high dividend yields synonymous with REITs.

The simple way to invest in REITs

Those who have been following my blog for some time already know what I am going to say. As I have previously wrote in my article titled “How To Start Investing With Little Money”, ETFs are the perfect way for the novice and/or lazy investor starting with a small capital. With as little as a $107 dollars at the time of writing, you can gain exposure to 27 high quality REITs in Singapore by investing in the Lion-Phillip S-REIT ETF (ticker: CLR).

For a more in depth comparison between the 3 REITs ETF that are listed on SGX, refer to this Seedly article.

Finally, I would like to end of this post by debunking a common misunderstanding that REITs are for those nearing retirement and unable to take on greater risks. In my opinion, there is a place in everyone’s portfolio for stable income producing assets such as REITs. The pandemic is perhaps the best argument for this as stable dividend pay outs can potentially tide us over a tough period. As usual, the exact proportion of your portfolio allocated to REITs should be tailored to your personal goals and preferences. Join my telegram channel here where I share more of my research!

4 Common Investing Mistakes

When I first dipped my toes into investing, I made many mistakes. These mistakes have cost me much in terms of realised losses and profits forgone. Yet, I am glad that I have made these mistakes when I am young and can afford to. This gives me the opportunity to learn from them and avoid repeating them again. Here are four mistakes I made when I first started investing.

1. Trying to make a quick profit by trading/buying on the news

When I first started “investing”, I would frequently browse the news to find companies to invest in. Whenever a company announced positive news, I would do a quick search on the company. For instance, Pfizer made a series of announcements about their break through in their covid-19 vaccination research last year. Wanting to make a quick profit, I jumped on the train and bought a few shares of Pfizer. However, by the time I had gotten in, Pfizer’s share price had already increased substantially. Later, when the news had died down, I sold the shares for a small loss because I realised that I was trying to trade. This proved to me the futility of trying to buy on the news. This is because by the time news such as this are published, many would have already known about it and bought the stock. Thus, the positive news would have already been priced in. Fast forward to today, Pfizer shares are around 100% higher than what it was last year. This goes to show the importance of knowing what you are buying instead of just buying on the news. I bought an excellent company at an excellent price but still manage to lose money on it, all because I did not do my due diligence.

2. Selling a stock because it’s share price has risen

I made this mistake earlier this year when I sold off my Bank of America and Goldman Sachs shares because the prices had continuously increased into what seemed like overpriced territory at that time. Afraid that the shares prices may dip, I decided to sell my shares to lock in my profits. To my horror, the share prices of these companies continued their upward climb and I ended up missing out on those returns. A quote from Peter Lynch sums this up nicely: “selling your winners and keeping your losers is like cutting the flowers and watering the weeds.” This event also goes to show that just because a company’s share price has seen a huge appreciation does not mean that it has realised its true potential. A truly great company will continue to grow for many years. Since then, I have shifted my mentality to one of adopting a long term outlook. This means buying great companies that will grow for the foreseeable future and leaving my money to compound. Additionally, this served as a reminder that fluctuations in share prices are part and parcel of investing. Thus, I should not sell my investments simply because I am afraid of a pullback in the near term. That is too near-sighted and can be a costly mistake.

3. Trying to time the market (waiting for the price to dip)

Similar to the previous mistake, this mistake has caused me to miss out on significant amount of potential returns. Since the market started its recovery in 2020, many have been warning of a potential market crash. With many indicators pointing towards a significantly overvalued market, I had reservations on investing. As such, I halted dollar cost averaging into the S&P500 index for 3 months. In April, I realised that waiting on the side lines for a market correction was counterproductive as my excess cash was incurring opportunity costs in terms of potential returns forgone. This reminded me of the saying that “time in the market beats timing the market” and proved to me the futility of trying to predict where the market will head in the near term. I have since continued to dollar cost average monthly without fail. So far, this has been paying off. While it is a fact that the market will eventually crash, I will never know whether it will occur tomorrow, next month, next year or even 5 years down the road. Thus, I will continue to stay the course and DCA monthly no matter rain or shine. In the event that the market crashes, I will buy even more.

4. Not having the conviction to buy more

This stems from a combination of not doing enough research and having enough faith. Sometimes, companies that I invest in may trend downwards and end up 10% below my entrance price. At this point, I want to buy more shares to lower my cost basis and because the lower price does not signify risk but opportunity instead. However, I often end up doubting myself. Thoughts that I could be wrong about this company or I could have missed out something fill my mind. I often let my self-doubt get the better of me and end up sitting on the side lines. Only a few months later, the share price has increased to hit all time highs. I am left with excess cash in my hand and full of regret that I did not buy more. Upon reflection, I attribute the self-doubt I experience to not doing sufficient due diligence and planning. Now, I deploy my cash in 2 tranches. The first when I find that the stock price has given me an adequate margin of safety and the second if the stock price ever dips substantially. While this may mean that I may sometimes never deploy all the cash I planned to, it gives me confidence that I will not panic to see my investments dip 10-20% for no valid reason.

You may be wondering why I still make these basic mistakes despite many investors already warning about them. Well, I may know the theory but when it actually happens to me, I start to doubt myself and become hesitant to act. This goes to show that investing is not a science, but a craft, where one has to learn from experience. If that’s the case is there a point in studying the mistakes of other investors? I would argue that studying the mistakes that others make will help us recognise our own mistakes when we do make them. This is the first step in learning from our mistakes and never repeating them again. Lastly, I would like to end this post by saying that mistakes are part and parcel of investing. What matters is that we ensure no mistake is crippling such that we will not have the opportunity to learn from it. This makes the case for diversification. But that’s a discussion for another time!