Two Ingredients in Investing

Let make it simple, for you to become a successful investor in long run, you only need two ingredients in your investing strategy- you have to think and invest in the long term and allocate your portfolio.

1) Invest in long term

The first ingredient for a successful investing –HOLD for LONG TERM. The market always goes up.  Ignore the short term noise, volatility, and sell down, hold on to your investment, and stay the course. You will be rewarded in the long run.

However, remember what I just said- the market always goes up not individual stock. An individual stock might come down and even goes bankrupt and being delisted from the stock exchange.

No matter how bad the news, the sentiment, and the economy are, the overall market only has one way to go and YES, always goes up.

It is not always a smooth ride but you eventually will ride higher with the market. Don’t buy an individual stock because you will never know whether it will succeed in the next 10, 20, or 50 years. Buy an index fund or ETF that tracks the overall stock market!

Stock Market Always Wins!

The stock market is the single best performing investment class over time. Don’t listen to others that Gold is the best investment! It is a lousy investment in long run!

For the next 5, 10, or 20 years, there will be many corrections, sell downs, and recessions. Your investment will take a hit but don’t run. It will be a scary ride but you will be safe if you invest in an index fund or ETF that tracks the total stock market.

Putting money in an index fund that tracks S&P500 for 1 day, the chances of making money is 54%, and losing your money is 46%. If you hold your holding for 5 years, your chances of winning go up to 86%. The data tells the longer your time horizon, the higher probability you would be making a profit in the market!

It is not the case if you hold individual stock because no one can be sure that it would not go bankrupt no matter how good it appears to be one, look at Enron in the US, Hyflux in Singapore, and many listed companies in Malaysia.

2) Asset Allocation

The second ingredient for a successful investing journey- allocate your asset!

Asset allocation is of paramount importance! You might want to put more in equities when you are in the stage of wealth accumulation. Dividing the portfolio into an appropriate percentage of stocks and bonds is crucial after retirement!

During the wealth accumulation stage, you can put 90 to even 100% of your portfolio into stock ( index fund) if you can take the stress of seeing your portfolio value drops more than 30%-50%. Remember, NEVER sell your portfolio during the bear market! If you want a smoother ride along the way, add in a certain percentage of bonds in your portfolio.

When you are reaching your wealth preservation stage, slowly move your equity into bond and make it 50%-50%. If you have other income streams when you retire besides your stocks ( such as rental income, EPF/CPF, dividend from REITs or other businesses), you might want to keep your equity ratio higher such as 60% or even 70%)

By having these two essential ingredients in your investing journey, you are destined to win in the market!