Before you learn how to invest, you need to know your net worth, so we can calculate the initial amount you can invest safely into your Bogleheads portfolio (read why Bogleheads portfolios work if you haven’t).
Most people do not know their net worth because they avoid the subject. Money is a hard topic to think about, but the first step to FIRE is to confront your current financial state. We need to know how much money we have to jumpstart our portfolio, and how much we should leave as cash for emergencies. Your net worth is basically your liquid + illiquid assets.
How Much Liquid Assets Do You Have to Invest?
Liquid assets are cold hard cash in your bank accounts, plus any non-performing stocks, bonds or investment-linked insurance policies (or ILPs, if you have any) that you are willing to cash out (to re-invest in your Bogleheads portfolio).
Note that cashing out ILPs early usually results in losses. You need to calculate how much premiums you have paid so far to be sure. Also, ILPs may be tied to existing coverages like death/illness/disability benefits. So you need to ensure that you are properly covered by another term policy before deciding.
Illiquid Assets (CPF + Property etc)
Illiquid assets would be your CPF funds, the current surrender values of ILPs (if you have deemed it unworthwhile to incur a loss by cashing out), and your property.
This portion is illiquid because it is hard or impossible to assess these monies (e.g. unable to touch CPF until 65 for retirement). We will not be using these for for your Bogleheads fund.
Emergency Fund
Your emergency fund is a subset of your liquid assets, and is for rainy days only. You should be able to access this cash immediately if need be. There is no hard-and-fast rule, but a popular one is 6 times your monthly expenses.
If you lose your job, the money will last you 6 months till you find a source of income (so you don’t dip into your investments during this time).
If you need S$2,000/month to survive (i.e. pay bills, mortgage loans, insurance premiums etc), your emergency fund should be S$2,000 x 6 = S$12,000. It depends on your profile. If you have a lot of responsibilities (like kids), your emergency fund should be larger.
There are ways to grow your emergency fund with low-risk methods, while keeping them accessible. We will talk about these in other posts.
Determine Investible Cash (Example)
Jimmy has S$30,000 in his POSB account, S$20,000 in his OCBC account, and S$15,000 of stocks in his brokerage account. He is adventurous and also has about S$1,000 of Bitcoin.
Jimmy is single and doesn’t have much responsibilities. He is confident of surviving on S$1,500 a month for the next 6 months, should he lose his job.
Jimmy’s emergency fund will be S$1,500 x 6 = S$9,000.
Jimmy’s Existing Cryptocurrencies Holdings
Jimmy bought some Bitcoin for S$500 not long ago ‘for fun’, after hearing all the hype about it, even though his friend said ‘bro it’s a bubble’. However, he knew that S$500 is an amount he is comfortable with losing, in view of possible upsides.
His holdings are now worth S$1,000. He is optimistic about Bitcoin for the long term, so we will let him keep his Bitcoin. We will talk more about cryptocurrencies in future posts.
Jimmy’s Existing Stock Holdings
Jimmy is disappointed with his stocks portfolio though. He has been watching scammy YouTube videos for stock tips, and listening to friends who like to ‘chase the next TSLA stock‘. He has been buying and selling stocks for the past 5 years, trying to strike the jackpot for easy money.
Trying to Spot Highs & Lows
Unfortunately, he always buys when a stock soars, because he doesn’t want to miss out. When the stock dips, he would get disappointed and try to cut his losses by selling (only to see the stock sometimes rise back up).
Cheap & Temporary Thrills
Sometimes, he feels great after making a few thousand dollars, only to break even (or even make losses) chasing other stocks with the profits. He soon realises that his portfolio has been dismal after half a decade. Unfortunately, only his broker is getting rich from the transaction fees he has been bleeding.
He decides to stop wasting time on stock picking (i.e. trying to win by buying individual stocks). He cashes out his S$15,000 of stocks, so he can re-funnel them into his new Bogleheads portfolio, which will be more successful over the long term.
Jimmy’s Investible Cash Amount
After taking stock of his finances, Jimmy has made the following decisions:
- Minimise the amount of cash rotting away in his bank accounts (S$50,000).
- Stop gambling on stocks, and cash out his current S$15,000 portfolio.
- Keep his ~S$1,000 of Bitcoin holdings for the long term.
- Maintain an emergency fund of S$9,000.
With these figures, Jimmy’s investible cash amount (to jumpstart his Bogleheads portfolio) is:
S$30,000 (POSB) + S$20,000 (OCBC) + S$15,000 (failing stock portfolio) – S$9,000 (emergency fund) = S$56,000.
Why Are We Investing All Our Liquid Cash (Except for Emergency Fund)?
Leaving an excessive amount of money in the bank (anything more than your emergency fund) is missing out on a lot of investment yield. The typical interest rate parking money in a bank averages 0.05%. Compare this to the 6 – 9% (or even more) a Bogleheads portfolio yields!
The ‘feel good’ factor of seeing lots of digits in your bank accounts is a psychological illusion. We want to quickly channel spare cash rotting in our bank accounts to our Bogleheads portfolio and make better returns.
Also, although some banks have special ‘high interest’ accounts like the DBS Multiplier or OCBC 360, they routinely do this:
How to Invest What You Have for Now
Now that you’ve determined your initial investible cash, it’s time to create our Bogleheads portfolio. Remember, the faster your portfolio hits your desired yearly retirement income x 25, the faster you can FIRE.
Read on to learn how to invest a lump sum, and then consistently.