The first big question to ask yourself!

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Why should I invest if the bank can keep my money safe for me? 

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I don't want to lose my money after all... Isn't investing basically gambling? 

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Don't I need to be a millionaire in order to invest?

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Statements like those you see above are common, and to be fair, they do hold some truth. 

 

But in reality, they represent misconceptions – stereotypes even – of investing. 

 

And it's time for us to debunk them together. 

 

To kick start our discussion of investing, let me first lay down some of the reasons I find most convincing for starting out your investing journey, and doing so as early as possible.

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1.  Money is safe in the bank?  That's bulls**t.

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Enter our money's worst enemy: Inflation.  Inflation basically means prices are rising. 

 

For instance, your favourite plate of chicken rice might have cost $2 in the year 2000, but as of today (2022), it costs approximately $3.50 to $4, on the lower end. 

 

From another perspective, inflation reduces our purchasing power (our ability to buy the stuff we want and need) over time. 

 

Why?  When we talk about purchasing power, we talk about the real value of our money or wealth.  We need to subtract away inflation to obtain this value.  

 

Suppose you put your money in the bank, and for some reason, the bank is offering a 5% interest rate per annum (or year).  That's pretty good right?  Your wealth will effectively grow 5% per year just by leaving it with the bank?

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But that's missing out the crucial other half of the picture.  Let's say that the economy is currently experiencing a 6% inflation rate, which applies to the same time period of 1 year (note that Singapore did experience this, in the later half of 2022). 

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The total effective growth in your wealth will become:

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5% – 6% = -1% 

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If the growth rate of your wealth is negative, it means that your wealth effectively decreases year on year.  In other words, without doing ANYTHING to your money... by default, you may be getting poorer and poorer.

 

Therefore... "Money is safe in the bank"?  I think NOT.

 

Observing recent inflation trends in Singapore paints a sobering picture, and validates the possibility of the scenario I presented you with just above.

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Singapore's Consumer Price Index from January 2020 to end-2022

Source: MTI (2023)

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Looking at the above image, which shows Singapore's Consumer Price Index, you can see that from since January 2022, inflation in Singapore has gone above 4% to hit a peak of about 7.5% as of the third quarter of 2022. 

 

Compare this against the fixed deposit rates offered by Singaporean banks as of December 2022 (which hover around 4%), and it is immediately clear that leaving your money in the bank isn't going to cut it any longer, should there continue to be high inflation. 

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2.  Investing is NOT gambling... not always, at least

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Gambling, or "speculation", basically means that you take high (possibly unnecessary) risks, while expecting a high reward. 

 

However, there are many different ways by which you can avoid unnecessary risk.  I present 4 ways here, which help differentiate investing from "gambling".  

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Firstly, by doing proper due diligence on a financial asset you are looking at, you can: (a) rule out any assets which raise red flags; (b) narrow down your choice of assets to high-quality ones (for instance, those with a long track record). 

 

Second, with there being so many asset classes offering competitive returns, you can always just avoid high-risk asset classes all together, if you don't feel comfortable putting your money in them. 

 

Some examples of these (which will also be discussed in later articles) include Crypto and structured investment products.  

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Third, certain asset classes can grant you the benefits of diversification, some with absolutely rock bottom costs.  

 

Diversification, or the ownership of a multiple assets, rather than only 1, helps to reduce the idiosyncratic (i.e. company-specific) risk within your asset portfolio.

 

Such risks can include the resignation of a long-standing key appointment holder, fraud, sensitivity to interest rates, insolvency and bankruptcy, and much more. 

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Last but not least, relating to the first point I made above, simply parking your money in the bank is unambiguously more of a gamble than investing your money.

 

Leaving your money in the bank (or worse, under your pillow) means that you are accepting the PHENOMENAL (and almost total) risk of eroding your wealth.

 

In contrast, investing not only allows you to reap the benefits of asset price appreciation – an indisputable trend in most, if not all, financial markets – but possibly also dividends, which are a key source of passive income particularly useful nearing or post-retirement.

 

To illustrate, based on studies by Wall Street giants such as JP Morgan, the S&P500 Index (one of the main stock indexes in the US market) has, on average, generated yearly returns of about 10% since 1926.  That's near 100 years of track records.

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S&P500 annual performance since 1926, showing majority of years being in the green

Source: Macrotrends (2023)

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Thus, compared to the interest rates or returns you get by leaving your money in the bank, investing literally is a no brainer, especially if you are young and have a long time horizon.

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3.  "But I need to be wealthy to invest..." – No, in most cases, you don't

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The barriers to entry for investing are, today, FAR LOWER.  Gone are the days where investing was the sacred temple of millionaires or wealthy men in suits.  

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Firstly, for common asset classes such as stocks, the minimum lot size – that is, the minimum quantity of stock you need to purchase at one go – has vastly reduced. 

 

Especially on European or the US stock markets, regular investors like you and I can get away with purchasing just 1 stock.  So, $100 or so?  Even less?  All possible.

 

For other asset classes , we have been given even more flexibility, with the implementation of fractional lot sizes.

 

As examples, on different cryptocurrency brokerages, investors can purchase things like Bitcoin and Ethereum 0.01 units at a time, or even less.  US-based brokerage eToro, for instance, has a minimum expenditure of just USD10, according to this recent article.

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Second, apart from the minimum quantity of stock required for purchase at one go, due to the number of companies listing on stock exchanges, including smaller, less established ones, there is now a great variance in stock prices. 

 

Even if you don't purchase the #1 stock for a certain market sector, you can be sure that there are others which have similar performance, without the price premium you may be paying for the top dog.

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Third, apart from investing by yourself, there are also other channels by which you can invest.  Today, asset classes such as mutual funds and unit trusts allow you to park your money with professionals who invest on your behalf.

 

With such products, besides transferring the responsibility of investing to a professional, who is obligated to attain certain investing goals and KPIs, you are also able to invest small amounts – e.g. $200 a month – through regular savings/investment plans. 

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Conclusion

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Ultimately, while it might be daunting to put your money in the volatile financial markets, there are indisputable merits to investing, and starting to do so as early as possible at that. 

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By investing, especially if you can remain invested for the long-term, that is one of the best ways to not only protect your wealth, but also grow it so that you can accelerate your charge towards your financial goals and aspirations.