This is the 2nd book I read by this author 艾爾文. I learn about him first through his YouTube channel.
Investment is about protecting your wealth, it is about putting your money to work at the right place. Investment will help your money to keep up or beat inflation. Out of the 40-60 work hours, how much of the salary is taken away by others, and how much of it is left for your investment fund? Given time, it can create a big difference between those who have set aside money for investment and those who do not. Imagine a life where you can choose not to go to work when you want to. You can do slow travel with your loved ones. When you return home, you realize that your net worth has increased instead after spending money on travel and not working.
This is a good life.
However, it cannot be achieved within a couple of years. It takes time for compounding to work its magic. It does not mean that you cannot reduce the time taken to achieve this.
Only through investment will allow you to create the life that you yearn for.
Having said that, it is important to learn how to invest properly. First, you need to accumulate investment knowledge.
The first key takeaway is when you are impatient and in a rush to buy the investment, it will be harder to make money out of the investment.
Different risk level
There are different types of risk, there are Knowledge Risk and Capital Risk. Every investment tool has its risks. The more knowledge you have about the specific category of the assets, the lower the risk is. Capital risk differs according to your total net worth. A S$10k loss could be detrimental to a net worth of S$100k. A S$10k loss won’t be a dent to a net worth of S$1000k. Need to understand the amount of your capital that is put at risk. No risk no gain. Too much risk and it can set you further back into your path towards financial freedom.
Principles of Compounding
3 factors affect compounding. They are principal, annual return, and number of periods (time).
= Principal x (1 x Annual Return)^number of period (years or time period)
= 3000k x (1 x 0.04)^25= 7997.5k
This is assuming the principal of S$3,000k, a 4% annual return over a 25-year time frame will more than double the sum to nearly S$8,000k
You need a principal and compounding will create a snowball effect. That is why the first 100k is difficult, the first million will come naturally after that. The time factor is important. You need to stay invested in the long term. It is not about the speed of growing your wealth but let time do its magic with compounding interest. It is like a marathon. Remember the story of tortoise and hare, it is about finishing the race and not dropping out of the race.
The Journey of Financial Freedom
The journey is not linear. There will be a moment when the compounding will gain momentum and your growth of principal will become faster. This is why you need to be hard on yourself during the earlier days to save more so that your future self can thank you for the effort.
Why is the path never linear?
Everyone makes a lot of investment mistakes due to greed and fear.
You must have the desire to place yourself at the start of the journey towards financial freedom. Not everyone wants to achieve financial freedom and they never will.
Investment objective
The investment objective is to acquire assets to create cash flow. It is never about capital gain. The crux lies with the consistent cash flow that the assets can create. Capital gain is just a one-off. You cannot keep repeating it. Yes, maybe you can but it requires work such as day trading. What I learned here is about consistent cash flow that allows you to achieve financial freedom.
The other key takeaway is to invest in a World Index Fund. With a limited amount, you can immediately gain access to a huge population of companies selected from around the world. This diversifies your investment risk. The probability of making money in the long term is high. The world index tends to go up in the long term. Technology improves, the population increases, and consumption increases. Countries become more developed and GDP increases.
The author advocates the usage of the bond index ETF to reduce the volatility of the portfolio. It is about rebalancing. For example, you have a 1:9 portfolio with 10% in bond ETF and 90 in equities ETF. In the event of a huge correction, equities fall and bond rises. The proportion becomes 2:8. You can sell your bond to raise cash and buy into equities to revert the proportion to 1:9. This is the beauty of rebalancing.
Dollar Cost Averaging
We know that Dollar Cost Averaging (DCA) can help to reduce the overall impact of market risk. I am not going to elaborate on how DCA works here. One of the takeaways is a lumpsum investment in a global index ETF could be better than DCA. This assumption is that the global index ETF is on an upward trend in the long run. It may be better to invest earlier and stay invested in the fund. DCA could be buying in at higher highs along the way. You can try to decipher the chart and make your call on this.
Two actions from this book: 1st is to help my wife invest her SRS using the lumpsum approach. 2nd is to continue DCA on VWRA. I have been trying to time the VWRA but to no avail.
The approach to choose ETF is to :
1. Prefer larger ETFs to smaller ones
The preference is to start with the following order of Global Index ETF, then choose regional ETF and sectorial ETF in a country.
2. Prefer simple to complex
Start with DCA to avoid timing the market then enter with a lumpsum investment
3. Prefer stability and safety
Avoid those overhyped ETFs when everyone is rushing into it, you should avoid it. It could be a matter of timing when everyone is chasing Gold Index ETF, Latin America ETF, Energy ETF, and technology funds.
Risk Reward Ratio
I understand the risk-reward ratio as a layman. The author helps to illustrate this using a chart. This is one of my learning in a pictorial format. When the risk is higher than the return, the probability of winning is low, the frequency of such events is high and it is difficult to invest in such a scenario. When the risk is lower than the return, the probability of winning is high, the frequency of such events is low and it is easier to invest in this type of situation.
Buying Zone for individual stocks
The key strategy to buying stocks is when the price has dropped below its intrinsic value. You need a strategy to load up the most positions in the company. The stock price may not hit the bottom and your funds may have already been fully deployed. There are 2 approaches to buying individual stocks when the stock price hits your target price.
1st approach:
1. Divide your funds into equal proportions such as 5 or 10 units
2. When the share price drops beyond the target price, on the day itself deploy your 1st unit.
3. Whenever the price drops beyond or hovers around the target price, you can deploy your next unit every 2-4 days. If you divide your funds into lesser units, you should deploy more frequently.
4. Once the price starts to improve, you need to stop buying in.
2nd approach:
1. Once the share price is near your target price, you need to divide your funds into equal proportions. Then you need to create a table to compare the % drop vs the number of units to deploy. For example, 1%, deploy 1 unit of fund. 1%-2% deploy 2 units of funds. 2% – 3%, deploy 3 units.
2. Once the share price drops beyond the target price, on the day itself deploy your units according to the % that it drops.
3. Once the price starts to improve, you need to stop buying in.
Zero Cost-based Investment
This approach could be a combination of dividend and capital gain that results in your holdings in particular stock already FREE or zero cost to you. For example, you have 7000 shares of Shell at a cost based of USD 30/share. Over the years you have already collected USD 30/shares worth of dividends. Then the stock is free to you. No matter if it rises to the moon or drops to zero, you have already recovered your principal amount. This type of stock is good to keep to collect more dividends. In the book, the author gave a good analogy that you don’t need to feed the goose that can lay the golden egg.
I like the topic of reinvesting your dividend to create greater wealth. I like to use the same analogy to explain to my mother that I have a chick that lays 5 eggs and let them grow into 5 chickens which can lay more eggs. Then the eggs can grow into more chickens and soon I have a pen of chickens. This is my personal investment philosophy. I redeploy the dividends to buy more assets and the cash flow will compound over the years. This is all about discipline and patience.
Buy the forest and buy the individual tree during a fire sale
Another key learning is to buy VWRA using the DCA approach as mentioned earlier every month. This is to buy the forest during the normal days. When there is a fire sale is when a bad news happen to a company. The share price drops a lot, the fundamentals are sound and you know that the bad news is temporary. This is when you need to deploy your cash and buy the tree. The author advocates saving a portion of your income to create a buy-the-tree fund.
An action for us to learn is to save 5% of the income to create this fund. When the opportunity arises, we can dump the funds into the individual company.
3 steps to embark on your journey toward financial freedom
Step 1 Understand your financial situation and set financial goals
You need to understand how much you can set aside every month towards investment.
Step 2 Understand your level of expenses. Understand the percentage of investable funds every month to determine the number of years to achieve financial freedom.
Step 3 Try to find means to reduce your current level of expenses and increase your income to speed up the number of years.
Let me know if you have questions and I can help you to construct a financial plan to achieve your financial freedom.
If you are interested in opening an account with Interactive Brokers, you can sign up via my referral link here. Interactive Brokers allows you to trade globally. The products encompass stocks, ETFs, options, futures, forex, bonds, and funds worldwide from a single integrated account.
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