One common question we get from readers from time to time is: “How much money do you need to start investing?”
It usually comes from younger readers who are just starting their careers, have saved up a little bit of money, and are now looking for ways to grow and invest it. But they’re not sure if they have enough saved up to start investing in the stock market.
As we touched on previously in this article, you don’t need a large sum of money to get started. In fact, it’s best to start off small and grow your portfolio from there — while learning to become a better investor.
We will ALL make mistakes over the course of our investing journey (I have as well), and it’s better to make the silliest mistakes when you’re starting off managing a ten-thousand-dollar portfolio compared to a six-figure one at the beginning. We’ve all heard of horror stories where some young, impulsive investor lost everything investing (read: gambling) the six-figure sum their parents bequeathed them.
To flip it around, the opposite is true as well. For example, if you can’t successfully grow a ten-thousand-dollar portfolio by 20% over a period of time, what makes you think it’s going to be easier growing a hundred thousand or a million? It’s going to be much harder managing and growing a million dollars. (I can’t even imagine how tough it is for Warren Buffett to grow $280 billion by 20% every year!)
So back to the question…
How much money do you need to start investing?
One popular option is a monthly investment plan offered by some of the banks and brokers in Singapore. In this scheme, you can set aside a sum as low as S$100 a month to invest in the STI ETF or blue-chip stocks in Singapore. (Though it might make more sense to start with $500-$1000 a month, which we’ll explain why below.)
With a monthly investment plan, your bank/broker will simply invest in the STI ETF or your selected stocks each month using the dollar-cost averaging strategy. This means you don’t bother with timing or valuing the market and you simply invest an equal amount every month. When prices are high, you buy fewer shares. When prices are low, you get to buy more. Over time, you simply average out the cost of your shares. It’s a viable long-term strategy (though not the most optimal), with the assumption that the stock market will always rise in the long term.
But what if you’re not into dollar-cost averaging and you want to actually manage your own stock portfolio?
How much do you need to get started?
The answer is quite straightforward
It depends on the amount of commissions and fees you’re paying. For example, most brokers in Singapore charge around S$25 per trade. This means if you want to keep your expense ratio at 1% or less, you need to invest at least S$2,500 per trade.
We had an email from a reader who wanted to start investing with $250 until we pointed out that the fees alone would cause him to lose 10% of his investment upfront. In other words, the stock then has to grow by 11% just for him to break even!
If you think $2,500 is still too high to start with, the good news is that brokerage fees in Singapore are coming down. For example, iFAST Financial charges a minimum fee of S$10 per trade — which means you can invest a minimum of $1,000 in one stock and keep your expense ratio to just 1%.
(Coming back to monthly investment plans here. Knowing you want to keep your expense ratio to 1% or less, it would make more sense to set aside $500-$1,000 a month as the banks/brokers usually charge a minimum fee of $5-$10 per trade for their monthly investment plans.)
Don’t jump the gun
Now the thing is, you don’t have to jump in and invest your first $1,000 the moment you have it saved up. It’s important to only invest when you have the right opportunity, meaning you’ve found a stock that passes your investment criteria at the right price. If you don’t have any opportunities, simply wait and save up. And only invest your funds when the right opportunity comes along.
The next thing you want to do is to diversify your portfolio. Although the exact number of stocks required to achieve diversification is debated across different studies, some studies have shown that having at least five stocks in your portfolio reduces your non-market risk considerably.
In the book Modern Portfolio Theory and Investment Analysis, authors Edwin J. Elton and Martin J. Gruber concluded that in a portfolio of 20 stocks, the non-market risk was reduced by approximately 80%. By adding more stocks, the reduction in risk was negligible. By owning five stocks, your non-market risk is reduced by 55%, by 70% with eight stocks, and by 80% with 20 stocks. And having more than 20 stocks further reduces your non-market risk only negligibly.
Knowing this, it makes sense to have at least five stocks in your portfolio while you progressively increase your holdings into 20 stocks. Again, you don’t have to invest in five stocks at the very start just for the sake of achieving diversification; always wait for the right opportunity before you put your money down.
Another thing to note is that diversification doesn’t simply mean investing in different stocks. It also means investing across different sectors, industries, and countries. For example, if you “diversify” into five different oil & gas companies, you’ll realise very quickly you’re not diversified at all when oil prices come tumbling down.
One way to achieve quick diversification is to invest in index funds or ETFs. For example, investing in the STI ETF allows you to own a basket of the 30 largest companies in Singapore (although you should note that you’re still largely concentrated in Singapore).
The fifth perspective
To conclude: If we want to keep our expense ratio at 1% or less and own at least a portfolio of five stocks, then the minimum amount you need to start investing in Singapore is, therefore, $5,000. This means you invest $1,000 each in five different stocks, using a broker that charges a commission fee of $10 per trade to keep your expense ratio at 1%.
Assuming you already have your financial parachutes in place, how long does it take to save $5,000? If you follow our guideline of saving $11 a day, you’ll accumulate that sum in just one year and three months. Not too long a wait to start investing if you haven’t started saving up.
But if you already have some funds set aside, then it’s a good rule of thumb to keep your expense ratio to 1% or less whenever you make a trade and diversify into at least 5-20 stocks for your portfolio.
We managed to invite a few popular names in the finance and investment education world to speak at our upcoming Shares Investment Convention on 16 September 2017 (Saturday)!
They’ll be covering topics on personal finance, macroeconomics and investment strategies to help retail investors make more shrewd decisions especially in the current uncertain and volatile economy. Click on the button above to learn more and grab your tickets. See you there!
P.S. Don’t forget to enter promo code “SHARES10” for a $10 discount!