The pandemic has thrown us all in for a loop. Global working hours are expected to have fallen by 14% in the second quarter of 2020, which equals to the loss of 400 million jobs, according to the International Labour Organization. This means reduced income, increased reliance on savings and more.
What the pandemic taught us, was how important it is to be financially responsible and financially savvy. If you’re fortunate to have been investing, then consider yourself lucky. Investing is still a novel concept to many, and it boils down to one key thing.
Barrier to entry to financial investment is high. Why? Financial products and markets are complex, there are many asset classes to understand.
What else? There is often a lack of affordability to invest in blue-chip stocks (corporations with billions in market cap, typically) and high-growth securities. It’s also difficult to pursue portfolio diversification and more often than not, there are hidden fees and charges to investment services.
With this in mind, we think it’s important to be financially literate, to understand and differentiate different asset classes and generally prepare for a healthy financial state. As 2020 has taught us, nothing is ever a sure thing.
We’d like to introduce a new section to Bitesize, “Bitesize Finance” which will cover a range of different financial news, bitesize coverage of different financial products and more. For this week, let’s quickly dive into investing 101.
Identify financial goals
Just like beginning a new workout regimen or changing your job, it’s important to identify the “whys”. Identifying financial goals is essential to mapping out a basic investment strategy. Most people invest to diversify their income and achieve financial freedom.
These are the 3 bitesize steps to follow:
Step 1: Identify Goal
Short Term: For immediate expenses, or a near term vacation i.e. a ski trip to Japan (whenever that can happen!)
Medium Term: Financial planning for the next year, such as planning a car purchase
Long Term: Setting yourself up for financial freedom or making plans for the next 5 years. For example, saving up to become homeowners by the time you turn 35.
Step 2: Personal Finance Management
The next step is knowing how to manage your expenses and savings. Personal finance management is crucial to financial health. You know what’s not healthy? Paying off 3 credit cards on an entry level salary. About 77% of Bankokians are in debt, and the first culprit? Credit cards. We recommend following T Harv Eker’s framework of the 6 Jars System, dividing your income into 6 portions.
- Daily Necessities (includes rent, food, other bills) 55%
- Investments (stocks, mutual funds, bonds, alternative investments) 10%
- Education (courses, coaching, books) 10%
- Play (leisurely spending, treating yourselves and family/friends) 10%
- Long Term savings (big purchases, rainy day fund, vacations, unexpected medical expenses) 10%
- Give (charitable donations) 5%
Step 3: Understand risk & return
Returns come with a side of risk. Factor in global pandemics, natural disasters or just a period of financial downturn. Ultimately though, it is up to you to determine your appetite for risk. What is your threshold? Then pick the asset class that is right for your situation. Factor in fees, rate of returns, liquidity and more. Investment funds aren’t like the ATM, you can’t withdraw money abruptly in a time of need.
A simple experiment to run with yourself is to frame it like this. Say you invest 10% of your starting salary of THB15,000, that’s THB1,500 right? According to this data set from JPMorgan, the THB1,500 in many asset classes since 2013 to 2019 will grow overtime, leading to wealth compounding despite some losses along the way.
For example, investing THB1,500 in the S&P 500 would give you THB3,140 in those six years. That’s not bad is it? Mainly because you’ll likely be adding on money into the investment pool as every year passes.
There’s nothing more important than understanding the fundamental drivers of each asset before investing. Who are the players? What are the technicalities and what are the risks?
People know stocks and bonds, but if they had to sit and lay out the differentiating factors, it may take a while. Do you want to invest in a mutual fund or buy the safer and steady bonds? Maybe you’ll want some portfolio diversification and do both.
Perhaps you’ll just want to invest in a fund, an easier way to have multiple assets at once. A mutual fund is like buying investment in bulk and it’s managed by a fund manager. Or, perhaps you prefer an ETF fund, a way to invest in a lot of stocks, bonds, and other assets at once.
Maybe, you’ll take Warren Buffett’s advice and sign up for an index fund. It’s a type of low-cost mutual fund or ETF that tracks a financial market index and tries to match its performance. It’s a simpler way of getting the benefits of broad diversification.
The bottom line is you should get resourceful. Facebook pages, blogs, twitter accounts and podcasts are endless, just be sure to check your sources and get the good ones.
When we say “mobile first”, we really do mean mobile first. Digital investment solutions and self-directed investing are on the rise, we don’t need to go into how much people rely on smartphones. The democratization of trading & investing has been fuelled by the internet and more recently, smartphones. It may be more widely adopted in markets like the UK and US, but take note.
At this stage, everybody knows the US based retail stock trading app Robinhood. The platform has its fair share of controversy, but it’s also paved the way for young investors with low barriers to entry. The platform has now 10 million users, and grew substantially during Covid-19.
Revolut, a UK based financial app which launched in 2015, now has approximately 10 million users as well, and what started as a challenger bank covering “all things money”, from money transfers to spending tracking, it has since expanded to offer commission-free stock trading on the NYSE and NASDAQ, digital assets trading and commodities trading. Revolut has also expanded into Singapore.
In short, it’s easy to get started and learn the mechanics of the market through an app on your phone. It’s easier to track your trades, the markets, the headlines driving the market with digitized resources. Of course, this leads us to the next topic; digital assets.
Introduction to digital assets
You can’t go a day without hearing about the rise of bitcoin, stablecoins and the all encompassing word that powers it all; blockchain. Now, we know the digital assets segment has gotten a reputation as of late, but it’s a space with relatively low barrier to entry and high potential.
It’s important to not get swallowed in the hype and we’d be the first to tell you to do your research before signing up to a digital exchange and start trading.
Despite its volatility, institutional investors are eyeing regulated digital assets, from Andreessen Horowitz’s cryptocurrency fund which invests in digital assets entrepreneurs, networks and businesses to JP Morgan’s changed optimism about the industry.
Our take? Allocating even a small portion of your investment portfolio to digital assets is worth exploring, especially for those looking to hedge potential inflation risk. Start small and don’t invest more than you can afford to lose.
In Thailand, there are 3 operational exchanges regulated by the SEC, with newcomers like Zipmex partnering up with well-known companies such as the publicly-listed Thaivivat and online travel unicorn Traveloka to solidify their reputation in the market. It’s easy to get started, there’s no paperwork required and all you need is a smartphone.