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Saturday, March 1, 2014

Make your first investments with confidence

Published on Mar 01, 2014

By Lynn Gaspar

"A JOURNEY of a thousand miles begins with the first step," goes the saying attributed to Lao Zi, the father of Taoism.

For new investors entering the stock market, that first step is often intimidating.

While many young adults see the stock market as an appropriate platform to make their early investments, finding the "best" entry point isn't always obvious.

The good news is there are plenty of resources available to help investors, including investment advisers, textbooks and courses.

These offer advice on how to study the market, research companies, read annual reports and run financial and technical analyses.

As valuable as these are, they can still feel daunting to those not familiar with investing. And importantly, they don't answer the question of what to invest in that first time.

To give new investors a head start, here are some simple rules to help you take that first step more confidently.

Invest in what you know
It sounds obvious but it is one of the soundest pieces of investment advice around.

What are you most familiar with? It could be the company you work for or - if your company is not publicly listed - consider firms whose products and services you consume.

Examples can be found in the food and beverage, consumer products and services sectors. What do you know about their products, business models or growth prospects?

Another good place to start is the blue chip stock.

Blue chip stocks are those of well-known listed companies that have large market capitalisations and are generally considered financially sound.

In Singapore, the 30 companies that make up the Straits Times Index (STI), for example, are blue chip companies. The regular commentary and coverage they receive from the media and analysts can help you learn about their performance and stay informed about their prospects.

Use available tools to narrow down and validate your investment choices
Websites such as SGX's MyGateway investor portal (www.sgx. com/mygateway) and various online broker sites provide investment tools that can be used to analyse market and company performance and help investors shortlist their options.

Stock screeners are particularly useful for filtering the stocks available based on your preferred dividend yield, market cap, share price and other criteria.

Chart viewers display the historical prices and trends of specific stocks and let you compare them with each other.

For those who are still hesitant, stock watchlists (often found on trading and finance portals) and portfolio applications let you simulate a stock portfolio and monitor its performance.

Just remember, these utilities are only simulations. The sooner you begin your investments, the sooner you may begin earning real returns.

Ease in with small, regular investments and diversify
If you don't have time to monitor the market, consider using a regular share savings (RSS) plan.

RSS plans let you make regular investments in small dollar amounts (as low as $100), which is less scary than making large single investments.

These plans also lock in better returns over the longer term through the use of the dollar cost averaging investment method.

Diversification typically requires a large enough portfolio to take effect.

Exchange-traded funds (ETFs) let you access a broad range of stocks with a single investment and provide good returns.

A good place to start is with STI ETFs. In the 10 years to June 2013, a dollar cost averaging plan consistently executed at the end of every month on the SPDR STI ETF would have generated an average annualised total return of 6 per cent, including reinvested dividends.

Start with a single step
Just about every important decision we make in life involves some risk. While taking that first step can be intimidating, there are ways to dip your toes into the stock market without accidentally drowning.

A more realistic way of thinking about the challenge is to consider what would happen if you didn't take the step.

With the cost of living in Singapore outpacing the interest payments on bank deposits, the bigger risk lies in not seeing your investments grow.

As Facebook founder Mark Zuckerberg put it: "The only strategy that is guaranteed to fail is not taking risks."

In other words, taking calculated risks today can help reduce the certain loss of real wealth that we face tomorrow.

The writer is head of retail investors at Singapore Exchange.

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