[Building Blocks]: Knowing your investment objectives

In my previous post, I talked about the styles of investing that majority of investors subscribe to. In it, I also mentioned that knowing one’s investment objective is key to understanding oneself before plunging into the investment world. To be more specific, by investment objectives I mean what do you hope to get out of your investments. Is it short term gains or long term income investment? Most of us should be working towards long term income gains. Thus, knowing what you want to achieve out of your investment will guide you along when you are making your investment decisions.

How to determine your investment objectives?

There are really no hard and fast rules to go about this. However, I would like to present some guiding questions which may help you go about crafting your own investment objectives. These investment objectives should be the main overarching lighthouse that guide your investment decisions.

1) What’s your risk appetite?

Are you someone who can sleep well at night if say your stock took a 10 percent plunge during the trading day? Or are you the type that worry even if the stock were to fall slightly. These questions are important because investing shouldn’t stress you out too much and compromises your health. You should look for something you are comfortable with and invest in it. Typically, a younger investor would be more risk adverse because they know that their investment time frame is longer than someone in their 50s or 60s.

2) What’s the proportion of your savings you are using for investment?

If you are putting up 90% of your savings to investment then it is important to diversify your portfolio with safer stocks because a large portion of your savings are inside it. I am not saying that its wrong to use 90% of your savings to invest. Just that if you are putting such a large proportion it pays to be a bit safer with it. By answering this question, it should help you decide how to distribute your money in different investments of different risks.

3) Are you short term or long term?

Are you someone who gets excited over small price increase and are eager to sell it to realise the gains or someone who is very patient and wouldn’t mind to wait for 10 years to realise the gains? This is important because it will determine what kind of stocks you will tend to choose. Those who are short term tend to trade on price action, are quick to take the profit off the table and then plunge into another trade.  Someone who is short term takes on more risk than someone who goes for the long term since there have been more bull markets than bear markets in the long run.

 

By answering some of these guiding questions it should give you a better understanding about the type of investor you are and what is at stake. Only when you know the type of investor you are can you go on to set a relevant investment objective and subsequently your style of investing to achieve your objective.

For me personally, I plan my investment objectives in 5 , 10, and 15 years so I get a holistic view of how my investing objective and style will change eventually. For instance, in 5 years, I am looking for more short term gains to quickly multiply my capital before I switch more towards looking for dividend paying stocks for the long run. I will share more about my investment objectives in the next post. That’s all for today! Have a great Christmas ahead! 🙂

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[Building Blocks]: Styles of investing

Hello everyone! I am starting a new segment called Building Blocks where I will share some important skills and knowledge in investing. Of course, I myself am no expert in this field, but I will tap on my limited experience and provide some pointers. So let’s get started.

It is important that one truly understand oneself before stepping into the investing world. By understanding oneself, I am referring to knowing your risk appetite, your investment style, your investment objectives and  your plan. I shall just touch on one of them today.

There are many investment styles out there , but most of us fall into 3 big categories. They are value, growth and income investing. All 3 styles are unique in their own ways.

1) Value

People who are more of a value investor tends to look for stocks that are undervalued by the market. Undervalued means that the intrinsic value of the stock is higher than the market value. This often occurs when some companies go through a period of depressed stock price or when they are near their 52 weeks low. Of course, that’s not the end of it. A value investor do not just go around looking for stocks with depressed price. The company must also have a business that are fundamentally sound. (Low debt, some areas that can boost the company’s earnings etc) Sometimes, the market may misprice all these companies causing their stock price to fall without any reason pertaining to the company’s earning ability. Also, a bad rumour can also cause the company stock price to fall, but value investors may see that this rumour  have no effect on the company future growth prospect. All these hidden gems are what value investors look for. At the end of the day, the company must have sound fundamentals to appeal to a value investor.

Some fundamentals that value investors look for:  –

  1. Price to Earnings ratio — Low
  2. Price to Sales ratio — Low
  3. Dividend Yield — High

2) Growth

Growth investors tend to look for companies with high earnings growth rate. These companies are usually small and mid cap companies that may have only listed on the stock exchange for a few years. These companies are young and small which allow them to aggressively seek growth opportunities either through mergers and acquisitions or through investing heavily in production. Growth stocks tend to give out low to no dividend because the company tend to reinvest the company’s earnings back into the business.

Some fundamentals that growth investors look for: –

  1. Strong earnings growth quarter on quarter or annually
  2. Return on Equity — Increasing
  3. Profit Margin — Increasing

3) Income

Income investors are people who invests in companies for their dividends. They tend to look for well established companies (mostly your blue chips like Singtel, DBS) who consistently pay out dividends to their shareholders. Blue chips are usually more expensive per share compared to other stocks but they are known for being more safe in a downturn. To look for these companies, they usually have a strong economic moat (strong market share, strong reputation etc)  in the area they are dealing with. Of course, blue chips are not the only companies that dish out dividends. Small to mid cap companies do give out dividends too. However, they may be less preferred as they may not be consistent in their dividend pay out over the years.

Hence, in a typical income investor’s portfolio, you will see a large chunk of money parked in blue chips and maybe a small part in smaller companies that give out dividends.

Some fundamentals that income investors look for: –

  1. Dividend payout: Consistent over the years
  2. Market Cap: Mostly large capitalisation

In summary, these are the 3 main investment styles that most of us have. These are not cast in stone. Some investors have a portfolio that consists of stocks with different investment styles. At the end of the day, it is still up to your risk appetite, investment objectives and plan to decide which style is suitable for you. For me, due to my low upfront capital and higher appetite for risk, my stocks are mainly value and growth. That’s it from me today. Have a great week ahead! 🙂