Congratulations! You’re ready to start investing. It might seem like a small step, but years from now you’ll look back and realise how meaningful this moment was to your financial future. This could be the defining decision that helped you achieve your financial dreams.
However, dipping your toe into the waters of investing can seem a little daunting at first. Questions of which stocks to buy, how to manage risk and when to sell are likely to be at the front of your mind. But help is at hand. Here, I’ll walk you through the main decision-making processes.
When and how do I buy my first stocks?
Over the long term, stocks outperform any other asset class, so deciding to invest in the markets is undoubtedly a good decision. But don’t run out and buy stocks straight away – no matter what “hot tip” has come your way.
Before selecting your first investment, you must complete the following financial steps. Attending to these details is vital to protecting your hard-earned nest egg.
1. Reduce high-interest debt
Reducing high-interest debt, if you have it, should be your top priority. Compound interest is among the world’s most powerful forces and when you have high-interest debt, that force is working against you.
Generally speaking, high-interest debt is any liability with an interest rate of 7.5 per cent or higher. Mortgages, and some car loans, therefore don’t qualify as high-interest debt (unless you have poor credit that makes your loan’s interest rate rise above this threshold).
The most common form of high-interest debt is credit card debt. Consider a US$10,000 credit card balance. If you pay off $200 per month, a reasonable minimum, it will take more than seven years to pay off. By the end, you’ll have paid out an extra $7,700 in interest because your debts were compounding that entire time.
There’s no way for your investment returns to eclipse any debt that’s piling up, so tackle that first.
2. Set up an emergency fund
Once your debt is taken care of, build up your emergency fund. Yes, this is a boring exercise, but it could be a life saver in the future. Set aside enough cash to cover your family’s basic needs for three to six months if your income was to suddenly stop.
You never know when a medical emergency, job loss, or natural disaster could strike and you don’t want these surprise circumstances to derail all the financial progress you’ve made. We often think these things will happen to other people, but not us. However, the probability we’ll live our entire lives without encountering any major calamities is very small.
3. Only invest money you won’t need for three to five years
There’s never been a wealth creator like the stock market. A hypothetical $100 invested in the US stock market back in 1871 would be worth $39 million today! Of course, $100 was far more money back then and no one would actually be alive to enjoy that money 150 years later, but you get the point.
This introduces an important caveat: While the stock market has always gone up more than down over the long run, it can be extremely volatile in the short term.
There’s no telling from one year to the next whether stocks will be up or down, and severe downturns do occur. During the financial crisis 10 years ago, the S&P 500 fell 56 per cent from its highs. If you had money in the stock market that you needed in short order – to cover a new house, the birth of a child, or a college tuition bill – you’d have been in trouble.
While the market has always bounced back from such downturns, those recoveries do take time. In contrast, most milestones in life don’t wait for the market to recover, so don’t keep money in stocks that you’ll need soon. Make your finances more accessible by keeping a sum in cash for spending in the near term.
4. Get started in a sensible way
So here we are. You’ve covered all of your bases: you’re free of high-interest debt, have an appropriate emergency fund and are ready to invest money that you don’t need in the near term.
Now, which stocks to buy? This will be a lifelong learning adventure, full of twists and turns. Your own temperament and interests will play a huge role in helping you select stocks and what we’ll cover here is only meant to help get you started.
Having encouraged investment into stocks, my advice to the first-time investor into the Vietnamese stock market is not to buy individual stocks, but rather to buy an exchange-traded fund (ETF). These are passive funds which replicate the performance of a basket of stocks and so remove the need for a huge amount of research and monitoring of individual ones by you the investor. Instead, you invest your money (either as a lump sum or by regular monthly payments) into an investment fund that in turn buys the major stocks in their focus index. In this way, your investments are better diversified, dialling down risk in an easy and cost-effective way.
Unfortunately, it must be said that your choice is limited here. The first and only domestic exchange-traded fund is the VFM ETF, which holds 30 stocks with the highest liquidity selected from the top 50 in the index. Having launched 15 years ago, today VFM ETF manages more than 35 per cent of the total assets under management of public funds in Việt Nam. You can see how popular getting broad-based exposure to the Vietnamese stock market’s growth is!
You may, therefore, also wish to add ETFs tracking other markets in Asia, or indeed across the world. Region and sector diversification are important in maximising returns and minimising risk – as is investing into a range of asset classes. But those issues are for other columns.
Like many investors, you may be more comfortable sticking to your home market, investing in the industries you can see growing and brands that you use every day. Buying direct stocks in a wise way can indeed produce strong returns and while this approach can be a lot more work many people enjoy the process of actively managing a portfolio – at least, that is, until “vertigo” sets in or the time demands become too great.
If you are prepared to be a high-conviction investor, check into next month’s column, where I will advise on how to research individual Vietnamese stocks and construct a portfolio suited to your risk-profile and goals.
* Brian Spence is managing partner of S&P Investments. He has more than 35 years of experience in the UK financial services industry as an investment manager, financial planner and M&A specialist. He is a regular contributor to the UK financial press and has a deep understanding of the financial services community. Brian’s column will reflect on all the challenges and opportunities within the Vietnamese market, bringing a fresh perspective to today’s hottest issues. The columnist’s email address is firstname.lastname@example.org.