Good investing does not require high-risk taking
The goal of investment is to generate a positive financial return through taking calculated risks. If your investment process constantly involves excitement and taking chances, you are likely to be speculating instead of investing. Having said that, there are only so many ways or mistakes that will make you lose all the money you set aside for your investment purpose.
“Good investing is boring.” – George Soros, The man who broke the Bank of England
Let us go into what you should avoid doing on your investment funds:
Where investments are involved, one man profits is another man losses. Frequently executing trades to time entry and exit point is surely not to anybody benefit, besides for the brokerage or trading platform you are using. While a single transaction fee may not seem much, the repetitive charges can add up over time. The spread on every trade you made, is also a fee that the trading platform earns at your expenses.
The promise of quick and effortless money surely is attractive, but how many actual day traders are successful with a proven track record in the long-term? You may be lucky in the short term, but as soon as your funds start to drop, you end up with no other options than taking even riskier bet to achieve the same profit as before, which usually results in a higher loss of your funds. This results in a vicious and never-ending cycle you will never get out of until your funds run out or you top up to your trading account.
No one can accurately predict where the market is heading in 10 years times, much less in 10 mins or an hour time. Factor that by the massive amount of speculators entering and exiting trades every single second, betting on short-term price movement really does not makes sense.
High growth potential, corrections in the valuation and change in market fundamentals are some of the reasons for an investor to invest in penny stocks. Penny stocks are speculative in nature as their market capitalization is small and prone to manipulation. The price is relatively cheap compared to your standard blue chips and large-cap stock, but remember that penny stocks growth and potential are still uncertain. Shares of such company that went on to become a market leader are known as a unicorn stock, and the scarcity can be implied from the namesake itself.
Usually, by the time the investment idea is sold to you, major players and institutional investors had already taken their stake. When interest in the penny stock are drummed up and capital starts to flow in from the retail investors, the major players take profit by selling their shares. As the retails investors brought in an all-time high valuation, they will be left with a paper loss or an actual loss if the shares are sold to cut losses. In the event of a trade suspension or delisting, the investor will be left with close to nothing on their investment.
Margin/ Contra Trading
Stock brokerages in Singapore offer a margin trading account, which allows trading without upfront capital. With the provided trading limit, the investor can trade on securities as if they have that amount of funds. A trade (T) placed have to be closed within 3 trading days (T+3). While investor stands to earns on any price appreciation, losses can be similarly huge on contra accounts. Unlike buying and owning a specific stock, investors are required to make good on any losses incurred once the trade is closed. The other option available is to buy the stock at the current market valuation, however, that can go up to a few hundred thousand dollars depending on the position and number of lots taken.
Similar to margin trading, leveraging allows an investor to receive additional funding by taking on debt. Assuming an investor is currently holding onto a S$100,000 in a unit trust fund. With leveraging, he will be able to “borrow” an additional 80% by using the S$100,000 investment as a collateral. The investor only has to pay an interest on the leveraged fund and is able to invest the additional funds.
Investing without leveraging
If the Net Asset Value (NAV) of unit trust fund drop by 30%, the current valuation of that investment will be S$70,000 if no leveraging is used. This means that the investor suffers a paper loss or an actual loss of S$30,000 if the investment is sold.
Investing with leveraging
Assuming the same investor leverage 80% of his investment to own a S$180,000 position in the fund, a 30% drop in NAV will result in a paper loss or an actual loss of S$54,000. Since the collateral is now valued at S$70,000, and the leveraged was based on 80% of S$100,000, this results in a margin call. Due to drop in valuation, the investor has to either top up into the collateral or a forced sale will be initiated. Assuming a selloff, the resulting funds from the forced sale will be S$46,000, minus any incurred interest on the leverage. This will be much lower than the value of S$70,000 if the investor had not leveraged.
Invest for the long-term
Instead of aiming to strike a windfall, generate financial returns for your Investment Portfolio by sound management and diversification. Instead of putting all your eggs in the same basket, speak to a financial planner that can propose a suitable portfolio based on your financial needs and objectives.
Read about: Managing your Investment Portfolio
Read about: Investing Basics: Diversification
We end off by saying that if an offer sounds too good to be true, do give it a second thought and consider carefully.
Drop us a message should you require additional information and we will get back to you on your questions as soon as possible.