Start with blue chips

For most people, the term “investment” tends to refer quite specifically to equities or stocks, and this invariably invites the question “which stock should I buy?”

The ensuing discussion somehow veers off unsurprisingly to speculation about penny stocks and the direction of prices. Excitement follows as the “promise” of a “sure thing” leads to ill-advised bets and possible tears later. Risking hard earned cash in speculative investments at the very outset to make a quick buck hardly counts as sound long-term investment management.

Ideally, one should begin by first focusing on stocks that can create a strong foundation from which to build a diversified equities portfolio.

For this purpose, one should prioritise companies with size, stability, strong brand name and resilient business models. Blue chips - stocks of nationally reputable companies with a long record of profit growth and dividend payments - can be a useful starting point.

Singapore has good names too

Fortunately, investors need not look too far beyond our shores to find reasonably sound blue chip investment opportunities. Singapore’s blue chip benchmark - the Straits Times Index (STI) – is a useful starting point. The index is comprised of 30 Singapore blue chip companies including a number of historic brand names that have been servicing the Singapore market for more than a century.

Take for example a company like Singapore Airlines. The airline flew its first plane more than 70 years ago on 1 May 1947. Look back a further hundred years and you’ll find the very first publication of Singapore Press Holdings’ The Straits Times circulated on 15 July 1845.

Fast forward many years and these companies are still thriving - a clear testament to the strength of their individual businesses and favourable domestic conditions which have allowed them to operate effectively without much trouble or difficulty.

Indeed, Singapore has consistently topped on the World Bank’s “Ease of doing Business” survey since 2007 and is ranked highly in Asia for corporate governance. Currently, it is also the only country in Asia with the highest sovereign credit rating from all three major credit rating agencies.

Such stability goes a long way into reducing the risk of disruptions to business operations, allowing blue chip names to focus purely on delivering profits and reasonable dividend pay-outs.

“The most opportune time to invest”

After stock selection, the next logical consideration would be finding the most opportune time to buy said stocks.

In an ideal world, we would buy shares when prices are low and sell them when prices are high. Alas, the real world is far from ideal.

On a more practical level, with markets responding drastically to even slight changes in the macro-environment, timing the market has increasingly become a valuable yet extremely elusive skill. The sheer complexities in the macro-environment have relegated the role of prediction to an art as opposed to a science, and certainly these artists are few and far between. The conclusion here is that timing the market may well be an exercise in futility.

The better option would be to let funds drip regularly into markets, picking up more stocks when prices are low and accumulating fewer shares when prices are high – an investment style commonly known as dollar-cost averaging (DCA).

In essence, you buy a fixed dollar amount of shares on a regular basis (typically this might be on a monthly basis) regardless of the share price. In this manner, DCA takes advantage of share price movements in the stock market. Over time, as you accumulate more shares when prices are cheaper, you are able to potentially lower the average purchase price per share.

Reap the benefits of investment discipline

(1) Start small

A key benefit of DCA is that it offers a simple solution to a practical problem.

While it is certainly ideal to have a sizeable amount of cash to invest, the fact is majority of us don’t. Hence, DCA presents an attractive opportunity for individuals who may be interested in investing but may not have substantial amounts of cash to do it.

Individuals who are new to the workforce or are burdened by heavy financial commitments can still choose to ease into investing through DCA. It offers a sustainable and affordable way for individuals to start accumulating shares and gain exposure in the stock market.

(2) Making investments palatable

The other key benefits of DCA stem from its application of human psychology and investment behaviour to a prescribed investment style.

For example, human beings tend to be more psychologically affected by losses than by gains. Simply put, the pain from losing money tends to linger, while the joy in earning positive returns tends to be short-lived as greed usually takes over.

Typically, the fear of losing money can overcome rational thought leading to potential paralysis in decision making. Plainly speaking, it means an individual could choose not to invest for the fear of losing money.

This is where the simple structure of DCA can potentially alleviate such worries. By investing an equal amount of money into shares on a regular basis, you are able to lower the average purchase price per share. This can be comparatively lower than the average share price over the same period of time. Framed in this manner, DCA “protects” you from potential long-term losses, making the idea of investing at least more palatable.

(3) Reframing the idea of losses

Once the decision has been made to invest, typically the next concern is the timing of the investment.

Unpredictable price movements in the stock market tend to generate much anxiety that may affect your decision to invest. The mental “what ifs” start coming to mind and often results in a “wait and see” attitude. With every passing day of indecision, chances are you probably won’t do much of anything. Eventually, the market moves for the better or worse, and the same cycle of doubt and hesitance begins again.

Again, DCA provides a simple way to overcome such emotional hurdles. By gradually investing in the stock market in a disciplined manner, DCA places smaller amounts at risk at a time. In so doing, you can take solace that any sudden drop in stock prices will not cause as huge a loss as if you had your entire lump-sum invested.

(4) Staying focused

While emotions can result in delayed actions, it can also lead to drastic moves as well. This is especially observed during a declining market when share prices are decreasing. Typically, we tend to be overly pessimistic during these periods and find it difficult to stay invested, believing that the recent decrease in prices will persist.

However, DCA prevents such knee-jerk reactions and stops you from completely terminating your investment plan. This keeps you invested in the market so that you are able to benefit from the market recovery later on.

Beautiful in its simplicity

The simplicity of the DCA structure helps the average investor overcome these behavioural tendencies which would have otherwise kept them from investing. It offers an affordable, sustainable and comfortable way for new investors to ease into the stock market without incurring the anxiety that comes with having too much invested in the virtual unknown in a short period of time. It is thus the more practical choice among new investors and investors who may not have the time to actively monitor the performance of the stock market.

Certainly, the popular question often posited by investment practitioners is “Why DCA?” Perhaps the best retort should be “Why not?”

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