When slow & steady can win you bragging rights

TOO often, we are pressured to find the next investment that can turn out to be the next ten-bagger but having a simple investment process can actually do more wonders in the long term.

A few weeks ago, a trip to Sentosa led me to see something interesting. A lady speaking in Korean to her child, based on what I can understand from my limited exposure to K-dramas and K-pop songs, was picking up debris scattered at Tanjong Beach. They were doing their part to help clean up the plastic bottles and other debris, and it may well be a scene you may also have witnessed.

The issue of environmental protection has gained more prominence in recent times locally. In his recent National Day Rally speech, Prime Minister Lee spoke about the urgency for Singapore to tackle climate change and concrete vulnerabilities such as rising sea levels as it is a multi-generational issue (which could come with a price tag of S$100 billion or more in the long term) which has long-term implication on our welfare, as well as our future generations.

Globally, the last couple of months have not been very kind to Mother Nature. We have seen the Amazon fires and the nonchalant responses from politicians including Brazil's President Bolsonaro and US President Trump. There are glimpses of hope amidst the hazy situation. It has been refreshing to see young activists such as Greta Thunberg from Sweden bring greater awareness on the climate change situation.

Critics may scoff at how things can really improve for the better. But, just like Greta and the Korean family at Tanjong Beach, small actions can snowball into something far larger. The danger is thinking our actions at an individual level does not make a difference. The truth is that all the efforts add up, from an individual to a household and to a national level.

When I think of investing, I cannot help but see a similarity. Too often, I find we are overly focused on making the big winning moves - the big changes in our investments that will make us huat big time.

Have you met anyone who thinks, "If I cannot find the next ten-bagger stock, I will just not invest"? In reality of course, that rarely happens. If you hear such stories from someone, it is likely that only the good experience was shared - and the not so good ones have been classified as best kept secrets.

Looking back at the last few months, a number of events happened that could have held us up in our investment strategy. You may have read that the US-Sino tit-for-tat moves on the trade war have cooled down one day, only to escalate back the next day. In August, you may also have read about the MTI's lower forecast of 0 to 1 per cent growth for 2019 for our Singapore economy, down from its previous range of 1.5 to 2.5 per cent.

If we invest based on what we read about daily occurrences in global markets, it is likely we are stuck. That is because the signals coming from the different analysts out there can be so mixed.

This one investment idea holds true for all of us

I find that in investing it is difficult to pinpoint the exact direction of the global stock markets in the next few weeks. Unlike the scientific research on climate change that shows we need to start making changes, research on where a stock price will end up in the short term is, at best, a guessing game.

What we have greater control over is our investment process.

So, take the idea of compounding. Compounding is the reinvestment of interest or dividend payout we receive on a stock or bond. For instance, I receive monthly interest payouts from my Asian high yield bond funds. These are then automatically reinvested each month back into the same funds.

In addition, I also receive semi-annual interest payouts from my Asian equity fund that is invested into dividend-paying Asian stocks. These dividends are automatically reinvested back into the fund. In Asia, Singapore stocks pay one of the highest dividend yields. The Financials and Reits sectors should continue to benefit from a lower interest rate environment and the relatively higher dividend yield of the STI is sustainable in the longer run.

The power of compounding relatively small sums of interest and dividend payouts over time cannot be underestimated.

How does compounding work

Let's say you want to achieve a certain goal. In my case, I have shared with investors about building and growing an investment plan with the objective of "Bringing Child A to University in 15 Years". Let's assume again that you have saved up $100,000 so far and you will invest this sum for Child A.

If we assume a 7 per cent annualised payout, and based on a starting capital of $100,000, the amount would grow to $276,000 in 15 years' time.

After year 1, the $100,000 portfolio would have grown by 7 per cent ie $107,000. The interest payout amounts to $7,000. But by the end of year 2, the portfolio would have grown to $114,490 because the yearly interest in year 2 will not be just equal to $7,000 - it will be higher at $7,490 as the 7 per cent is calculated on a larger investment amount of $107,000. When this compounding goes on for 15 years, the investment amount grows to almost $276,000.

Another excellent example of how compounding works is via a regular savings plan (RSP). An RSP means you are investing every month, eg, $1,000 and you can also then allow that monthly investment to compound over time. There are benefits to doing an RSP. Firstly, there is an inherent discipline in sticking to a regular investment plan without falling prey to varying market sentiments, and two, it helps in dollar cost averaging. So, I would encourage you to look into online financial tools such as RSP Calculator and if you are into dividend payouts, please do check out tools such as the 'Fund Selector that has filters on Dividend Paying investments. The CPF website also has very good calculators for you to try out.

Slow and steady wins the race

There is not much to brag about when it comes to compounding - imagine someone saying, "I invested into this ten-bagger stock!" in response to me sharing, "I like how my investments compound over time". But sometimes you can take quiet satisfaction knowing that your investments are actually working hard, just like how the Korean family was doing its own small part in cleaning up the environment.