The coronavirus pandemic has resulted in falling stock market prices everywhere. With so many stocks seemingly on sale at the moment, even new investors are looking to start buying shares too. But should you take the plunge? Here are some important considerations and tips for Covid-19 investors.
Taking the first steps in investing is scary for most people. But when it comes to investing during times like these? "Scary" doesn't even begin to describe it. If you're looking to start investing now, we applaud your guts!
To answer your question, there's no real "right time" to start investing. Rather than trying to time the stock market, it may be better to take the general view that - regardless of whether you invest today or next week - chances are you'll be investing in assets at a discount anyway. (As for when those investments will go back to their regular price? That's a whole different story.)
That said, there are a few questions you should ask yourself before you take the plunge...
Before you even begin to think about investing, take a good look at your cash savings first. Do you have at least 6 months of expenses in your emergency fund? In uncertain economic times like these, we would encourage you to grow your cash cushion to 9 or 12 months' expenses before you start investing the excess. If your emergency fund isn't enough to last you 6 to 12 months, STOP! Focus on building that up first.
In volatile periods like right now, you just don't know what kind of rollercoaster ride your investments will go on. So, holding power is key - don't count on cashing out your investments anytime soon. If you have any big expenses in the next 1 to 2 years, like buying a home or starting a family, we suggest you keep that money in a high-interest savings account instead.
You need a really strong stomach to invest during Covid-19. The situation is still developing, and all kinds of things might happen to your investments from now until... who knows when? So you need to keep your cool if (when!) you see your investments bleeding like nobody's business. Your guts of steel will save you from panic-selling and making a huge loss in that event.
At MoneySmart, we're in the business of letting you compare financial products - we're definitely NOT investment advisors. So we're not going to recommend any particular moves or make decisions for you. Instead, we invite you to consider the following before making your choice.
The main reason why lots of newbies want to start investing now: Low prices. Stocks (and many other assets) have crashed and are super cheap right now. When you buy at such low prices, it seems to increase your chances of selling at a profit.
The tough economic times have forced both companies and investors to shift their focus from aggressive growth, to business fundamentals like sustainability and ability to adapt to changing circumstances. That's good news for conservative investors.
While stock market indices are in free-fall, the astute investor may find opportunity in picking companies that have a better chance of winning in this environment. Had you invested in Clorox or Sheng Siong, for example, you would have made a profit.
To be clear, no one should be treating the Covid-19 recession like it's a 50% off discount at NTUC FairPrice. With unprecedented levels of unemployment, it's an incredibly serious situation that shouldn't be taken lightly. The following thought-starters should give you pause before you plunge into things:
As always, nothing is guaranteed when you invest. Yes, you may have bought shares in your favourite companies for cheap... But those firms can very well collapse (like several airlines already have) and leave you with nothing.
Unlike previous downturns, where the collapse of one sector impacted the wider economy, the Covid-19 recession is different. We're seeing widespread job loss across different sectors, which is way more severe and potentially very hard to recover from.
Covid-19 being an entirely different beast from previous recessions, we don't have much data to work with in predicting what's going to happen. We don't know how long it will take before markets recover - or if they will ever recover.
Technically, the barriers to entry are low. On SGX, for example, most stocks are bought/sold in lots of 100. If a company's share price is S$1, you will need to invest at least S$100 for 1 lot of 100 shares. However, you still get charged the minimum commission of S$10, which eats into your profits significantly. To streamline costs, it's better to invest with a good sized lump sum (say S$5,000 or more). Alternatively, opt for a Regular Savings Plan or robo-advisor, which allow you invest small amounts regularly (e.g. S$100/month).
Most investors start by investing in the local market, because it's easier to understand and get a feel for. In our context, that would be on the Singapore Stock Exchange, or SGX. The flip side of this is localisation bias, a.k.a. putting all your eggs in one basket. Going global (e.g. buying US-listed stocks) diversifies your investments so you are less dependent on one single economy.
You probably know about stocks/shares already - where you buy a small part of a company to (hopefully) reap its profits. There are lots of other types of investments as well, such as ETFs, REITs, bonds and commodities. We'll talk about the common ones below.
To get you started, here are some common investment types (sometimes called "asset classes" by men in suits) that are available to invest in both in the local and global markets. This is by no means an exhaustive list, though.
Stocks, shares, equity - same difference. These are little slices of a company that individuals can buy. When the company profits, you (theoretically) profit too, and vice versa. Due to Covid-19, most stocks have fallen in price, but some suffered much more than others (travel, entertainment and hospitality for example).
ETFs or Exchange Traded Funds are baskets of (really, really tiny little bits of) stocks. These typically track a 3rd party index such as the Straits Times Index or S&P 500, so you don't get to choose specific companies to invest in. Most worldwide market indices plunged due to Covid-19 - and along with them, ETF prices.
REITs are kind of like stocks, but for real estate. Instead of being part-owner of a company, you become part-landlord of a real estate conglomerate such as CapitaLand. As you would expect with lockdowns everywhere, REITs are doing really badly at the moment and are therefore cheap.
Bonds are "debt instruments", where you lend money to an entity (e.g. the government) and they repay you with interest. Traditionally, bonds did well in recessions, but this has not been the case for the Covid-19 economy - bond prices are not performing as well as most thought they would.
Similar to bonds, gold (yes, as in gold bars) was thought of as a safe haven in recessions. However, gold prices actually dipped during the coronavirus recession. The dip has not been drastic, but it goes to show what strange times we live in - and that no investments are truly safe.
Commodities, such as crude oil, fluctuate very dramatically. Generally, prices follow the laws of supply and demand - but both can be driven up and down by things like geopolitics and natural disasters. For that reason, it's difficult to even explain, much less predict market movements.
No matter what you plan to invest in, you'll need to sign up with an investment brokerage. A brokerage allows you to buy and sell investments, not just on SGX but on other stock exchanges, too. (Alternatively, you may choose to go with a beginner-friendly robo-advisor, but these do not give you the freedom to precisely pick and choose your investments.)
If you are buying stocks on SGX, you may have the option of opening a Central Depository (CDP) account. This provides integrated clearing, settlement and depository facilities for investors. Under CDP, investments will be in your name. Some brokerages do not require a CDP account. Instead, the brokerage holds your stocks for you (note that they are not in your name).
If you are using an investment brokerage with a prepaid account, you will need to transfer funds into your investment account before you can start buying shares. For most online brokerages, you can do this with a simple PayNow transfer or bank transfer.
So we've established that you need an investment brokerage in order to start investing in Singapore. But how do you choose the right one?
Each time you buy or sell shares, you need to pay the broker a commission fee. If you're a buy-and-hold investor, it doesn't matter so much. But if you plan to trade frequently, make sure you choose a broker with low commission fees.
Ideally, you want your shares to be under your name in your personal CDP account. However, most of the cheaper investment brokerages hold your investments in a (generic) custodian account instead. You have to decide if you want to pay a premium for CDP.
Since online investment brokerages are pretty much a self-service affair, you'll want a platform that is easy to use and to understand. You want something that shows the relevant data points (e.g. share price, historical charts) and an intuitive interface.
Find the perfect brokerage for you with MoneySmart's new investment brokerage wizard. Compare commission fees, markets/investment products available, and ease of use before you open an account.
Looking for more financial advice around Covid-19 in Singapore? Head over to our coronavirus microsite for info on government assistance schemes, circuit breaker tips, and personal finance tips for surviving the pandemic.