How to achieve financial independence in Singapore? (Part 2: Passive Income)

Passive Income

Now, this is the more important aspect to achieving financial independence. With a lot of savings, if you don't put them to work and leave it in a bank, you are basically losing the fight against inflation, and your money is slowly eroding away. To build a good passive income stock portfolio, you firstly need to learn the basics of investing. That means taking the first steps to invest your money; opening a CDP account, setting yourself up with a stock broker, reading into all the stock market jargons and researching on prospective stock buys. The point is not to procrastinate and start taking the first few steps. Once you start, your learning journey will begin. You will make mistakes, learn from your mistakes and grow stronger each time. Eventually, you will grow into an above average investor who is capable of being right more often than wrong. 

Invest, Don't Gamble

Okay, so you opened your trading account and started investing. The purpose of investing is to get returns on your investments. If you are not doing your homework, and you find yourself buying stocks based on what other people are saying, based on financial analyst reports, or based on your general feeling of the company, you are gambling. Really the stock market is a projection of human behavior. When a worry spreads, people panic and start selling. When there is euphoria in the market, people are overly optimistic about a stock and rush to buy, resulting in the stock being over-priced. By following the herd, you will always be behind in terms of your stock performance, and it'll be unlikely that you earn profits. So, do your own homework, and trust that your due diligence will bring rewards.

If you are like majority of the working Singaporeans, and you don't have much time to constantly monitor your stocks, I would advocate a more passive approach to investing. The key thing to look out for in the companies you want to invest in is it's ability to sustain and grow its dividends. Of course, there are many other factors to consider, but if a company can continue to pay me meaningful dividends and has the potential to pay me higher dividends in the future, I subscribe to that. The only reason you should sell your stocks is when that ability to pay meaningful dividends come into question. Because I don't buy and sell my stocks very often, I get to sleep in peace and monitor my stocks only once or twice a week. 

Growth vs Dividend Investing

There are always different school of thoughts, different modality and approaches on how one should invest money. One of the main contention is between growth stocks or dividend stocks. Growth stocks typically do not distribute dividends as most of their earnings are reinvested in the company to, well, grow the company as its name suggests. Investors typically look for companies with better than average growth performance and hope to earn money by capital appreciation. These stocks are also typically overvalued as investors price in future growth. Dividend stocks, on the other hand, are typically well established companies who are able to provide sustainable dividends to shareholders. Investors earn through the dividend payouts typically.

What I advocate is a combination, a dividend growth strategy. The key to this strategy is to find companies who are able to pay sustainable dividends, and have a good track record of increasing dividends. This means finding companies with strong fundamentals and growing earnings. If you are able to identify such companies, the natural tendency is for the company's stock price to trend upwards. The thing about buying these kind of stocks is that you need a lot of patience. These stocks normally do not have very high yields at the beginning. But if you invest correctly, and as dividends continue to increase, so does your yield to cost. This is how you hear of some people achieving double digit yields on their stocks from dividends.

Sir, Are You a Trader?

If you focus solely on growth stocks, your rewards may be high, but your risks are also high. Remember, if you lose 50% of your portfolio, you need to attain 100% just to break even. In other words, your losses hurt more than your gains feel good. As I mentioned, we have been in a bull market for the past decade or so. Growth investors have had an extremely fruitful time, and many people who having been investing for some time have never experienced a global recession. This can create a false sense of complacency, leading many to believe that they can consistently generate such high returns. To be a growth investor and a good one, you need to do your homework. You need to study up on the company and other macro factors. You also need to keep a close watch on the company's earnings and growth. It is a lot of effort. If you are not putting in the effort, you are speculating. And like many Singaporeans, our jobs demand a huge part of our time, and that effort is not something that everybody can sustain.

CONCLUDING THOUGHTS

If you are just starting out on your financial independence journey, your primary focus should be on capital accumulation. Your focus should be on how to increase your income, and how to reduce your expenditure, so that you have more money to invest. You can and should start investing, however small a sum, and continually learn from your mistakes. Once you have built up a sizable capital, your focus should be on identifying stocks that pay sustainable dividends. This should continue until the point where your passive income is able to substitute your income from your job.

Remember, set realistic financial goals for yourself to achieve, and don't forget about inflation. Inflation means that the cost of living 30 years later is not going to be the same as now. That plate of chicken rice might be $10 a few decades later. So, stay disciplined on your path to financial independence and enjoy that $2.50 chicken rice today!