My Portfolio is $3,000, How Should I Start?

Last week, I wrote on The Harsh Reality.

I guess it resonated with some of you. The truth of the matter is… this is the reality and we should not shy away from it.

As the sole captain of our life, we should confront the reality and steer the ship to better conditions.

Acquire a new skill set, earn via percentage instead of fixed remuneration, grow your cash flow.

Whenever I conduct personal trainings for group of leaders, I’ll always ask them: “what’s your dream in life?”

Most of them could not answer that. It is not any fault of theirs but it seems all of us need to rediscover our own dreams.

It’s time to step back and re-evaluate what your growth trajectory is in the next few years?

How can you grow more, how can you earn more? How can you GIVE more?

It’s time to design your future. It’s time to get started. Don’t read and do nothing.

Do SOMETHING. NOW.

How Should I Start with S$3,000?

Few days ago, I received this question again.

“My Portfolio is $3,000, How Should I Start?”

It is the top question from all of my readers.

Rich people get rich by acquiring assets. They exchange money for assets.

Assets that will appreciate.

Assets that will generate cash flow for them.

Average people remain average by spending excessively or acquire liabilities. They exchange money for possessions that do not generate cash flow.

When you’re starting out, one of the fastest ways to grow your wealth is through investing in stocks. You do not need more than $5,000 to start investing.

The faster you can save, the more you can allocate to build assets for yourself.

The first key is… open a brokerage account.

FSMOne is a good choice with its lowest commission rate. Remember, the more you can save on commission charges, the more you have to invest.

For screening stocks, CIMB might be better.

Create your account now by clicking on this link. Once you’ve got that settled, it is time to assess your current financial situation.

Assess Your Current Financial Situation

Can you start creating a savings of $500 to $1,000 monthly to grow your investible pot of money? Consider looking for ways to increase your monthly income, reducing your debts, reducing your expenses. Take stock of your financial situation!

Some people repositioned themselves better on LinkedIn, managing to secure jobs that pay 15-30% more compared to their existing pay. They managed to find jobs that were willing to pay them with a salary that was more representative of their work capabilities.

Do you carry any existing debts? If yes, can you clear those debts first? This allows you to save eliminate interest payments on your debts.

What are your expenses now? Can you reduce some expenses?

Only after we take stock of our financial situation can we decide on how to move forward. You need to know where you are before you set off.

Download your credit card bills and review your spending. Circle those expenses which you know are impulsive or redundant. 

Assume you’re going to make 20% returns by investing in a company, the returns are going to be different when the invested amount is different.

20% of $3,000 is $600.

20% of $15,000 is $3,000.

You see, once you start having a substantial amount to invest, the returns are going to be more meaningful.

You are likely to spend the same amount of time analysing a company whether you’re investing $3,000, $10,000 or $15,000 into it.

The key distinction is when your capital is low… focus on growing your cash flow first.

Why? When your capital is low, you cannot diversify your stock picks. You are likely to hold 1 or 2 companies and that could be a bit risky if you are totally new to investing.

When your capital is below $5,000, allocate your time to 70% increasing cash flow and 30% learning how to invest properly.

The returns from the stock market are not always a straight line up. THe journey is full of ups and downs. Overall, it should be a nice gradual uptrend. For cash flow, it will be more consistent.

While you’re building your second source of income, keep your eyes on your main source of income. It will generate the resources for you to build your second source of income.

What Companies to Buy?

After you purchase shares of a listed company, you’re no longer… just an employee.

You’re a shareholder of a company. You’re an owner.

If you’re young, below 35 years, I want you to NOT invest in dividend-paying companies.  

Dividend paying companies tend to be in their mature stage of life. This is where they take all of their earnings to give out as dividends to its shareholders.

You’re going to make 6-8% dividend returns per year.

That is not enough to grow your wealth. Ideally, you want to grow your portfolio by 15-20% per year. You can achieve that by investing in growth companies.

[Related: You can learn a ton here from my book that I published very recently. It’s called Value Investing – Expand Your Circle of Competence. I go much deeper here and I have pen downed my thought processes when investing in growth stocks. You can check it out here.]

You need to set your investment criteria. You need to raise your standards.

“What are my standards?”

1. Return on Equity?
2. Debt/Equity?
3. Profit margins?
4. Cash conversion cycle?
5. Profits growing? How about cash flow?

Don’t buy companies operating in an industry with too much competition.

Don’t buy companies with low profit margins.

In my workshop, I also shared that not all business models are made equal, some business models are made more superior by design.

Is it better to invest in a F&B company or invest in technology company?

A F&B company suffers from high labour and rental expenses. Each expansion requires purchasing new equipments and fixtures. The scalability is not as quick as a technology company.

Is it better to invest in a construction company or healthcare company?

A construction company depends on the order book heavily. The demand is not stable. On the other side, a healthcare company tends to have stable growth.

It is going to be fun and exciting. You’ll learn the pros and cons of each business models.

At the end of the day, why are some investors performing well in the stock market?

It boils down to their… company selection AND portfolio construction.

Portfolio Construction

The biggest fool in the world is someone who does not ask questions.

In the past 4 months, I met up with several people from different age groups. All of them have portfolio size of over a million.

I discovered:

• the most inactive investors tend to outperform the active ones.
• the performing investors are those who seek for multiple opinions before taking actions.
• they have more than 6 stocks but less than 20 stocks
• they focus on easy to understand companies.

I am using fictitious names here, Sierra and James.

For Sierra, whenever she decides to buy a company, she would ask her son-in-law and her daughter for advice. She takes time to think before committing to any company.

For James, whenever he receives a stock tip, he would buy the stock immediately.

Looking past all of their statements over the last 6 years, James lost over $630k while Sierra gained $332k.

I am amazed how much mistakes could have been avoided when we decide to embrace transparency and openness.

You can look stupid all you want but you gained an important lesson/knowledge — ultimately that is smarter choice, right?

But most investors pretend to be very smart people. They believe in their superior abilities and they refuse to have their ideas discussed or exchanged.

All of us have our blind spots.

Here are my top tip for portfolio construction:

• Aim to buy the best 4 – 5 companies. As your portfolio grows bigger, aim to hold 8 to 10 stocks.
• Do not purchase all of your allocation at one go. If you intend to put 25% of your portfolio into company A, do it in tranches. Don’t overload.
• Keep 10 – 20% of your portfolio as cash. You’ll never know when opportunities may appear.
• Seek mentorship from experienced investors. Get first-hand experience on how they build their portfolio.

Conclusion

There is so much more I would like to share with all of you… but this post is getting too lengthy. To be very honest, investing is an adventure that never ends. Each day, I am absorbing so much information and learning from everyone.

Our brain is wired to sabotage ourselves. When we see our portfolio in red (losses), we hate it. Our brain would send signals of danger which may prompt us to sell the stock even though there is nothing wrong! We associate losses with negativity and pain.

We need to ‘hack’ our brain to know that prices may not reflect the underlying value of the business at times. It is okay for our portfolio to be in the red, and we should have the temperament to stomach some volatility in our portfolio.

I started with nothing but investing gave me the freedom I have now. I wish that you take it seriously because it’ll change your life.

All of us have the ability to be a good investor. Don’t give up and I believe in you!

Chat with you guys next time!

Want to learn how to identify growth stocks? Check out my book here!