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Best Steps to Grow your Portfolio Today


Financial portfolio management is key to elevating your quality of life. Instead of worrying about when your next paycheck will arrive and methods to make unexpected monetary payments, through forward planning and funds allocation, you will be able to thrive while living life worry-free.


I recommend a multi-pronged approach to portfolio management, each with its benefits and risk involved, but together allow you to compound your portfolio without worries.

  • Base Layer: Emergency Savings (>1.5% p.a., high liquidity, no risk, buffer against drawing out investments in an emergency)

  • Middle Layer: Dividend Investments (>5% p.a., consistently high dividends that grow over the years if REIT/stock is bought at an undervalued price, lower volatility)

  • Top Layer: Value-Growth Investments (>15% p.a., compound your portfolio through active investing)

I will share 4 critical steps to grow your portfolio below.


Step 1: Set up your Emergency Fund:

Setting up an emergency fund is one of the most sensible measures you can take. Having an emergency fund is mandatory to planning your finances. It has to be mandatory because you never know what the future is going to bring into your life. What does matter is how well-prepared you are to meet them, and the first step is to set up an emergency savings account.


To determine the amount to save in your Emergency Fund, calculate the expenses and financial needs that you have each month: electricity, water, mortgage, food, etc. the emergency fund must be able to cover these expenses for 3 to 6 months in case we do not receive any income during that period, without the need to sell any of our assets.


The high-yield savings account which I recommend, with high interest rate (1.3% per annum), high liquidity, and no penalty for early withdrawal is the Singtel Dash Pet account.


Investing in this plan will provide you with an additional amount of $130 a year, with no risk as the account is capital guaranteed by SDIC. There is also no lock in period and you will be able to withdraw the amount any time you need or once you have found a better savings or investment opportunity.


Step 2: Budget Effectively

Spend below your means

The critical component to build your portfolio is to spend less than your income. If you do not save, there will be no funds for your investment portfolio to compound. The recommended spending percentage is 50% needs, 30% wants, 20% savings. However, the more you save, the earlier you will reach your financial independence goal. There are individuals who purport saving more than 50% of their income, and I encourage you to do so if it makes financial sense.


Track your spending categories and amount

Track your expenses to know where you spend your money on, and cut out unnecessary spending. Here are some common categories you can reference: Food, Housing, Transport, Essential needs, Health, Debt Repayment, Insurance, Education. The goal is to get value for money on the critical items, and minimise all spending on unneeded wants such as luxury items and vices.


You can read more about effective budgeting strategies here.


Step 3: Invest in Dividend Companies

Upon building up your savings, I would place them to work to provide passive income streams as you work hard to generate income in your professional role. One mode of investments is to invest for dividend, which can either be in REITs (Real Estate Investment Trust) or high dividend yield companies


REIT Companies:

Investing in REITs gives you a stake in the rental incomes of commercial and retail buildings, while paying the REIT manager a management fee. REITs are expected to distribute 90% of their income, which can represent a 5-6% yield per annum for your investment. Here are some metrics which I look before investing in REITs.

  • Gross Revenue: The gross revenue of your desirable REIT should be growing.

  • Property Yield. The property yield of your desirable REIT investment should be above than 5% per annum.

  • Gearing Ratio: While looking for an REIT investment, make your move only if the gearing ratio of your potential REIT is less than 40%.

  • Distribution Yield: A suitable REIT should have a distribution yield greater than 5%.

  • Healthy Portfolio Occupancy Rate: The overall portfolio occupancy rate should be above 90%, and as close to full occupancy.

  • Acceptable Price-to-Book ratio: for your desired REIT, the P/B ratio should be under 1.1 before placing it on your checklist as a value-for-money purchase.

An example of one such REIT company is Capitaland Integrated Commercial Trust. It is one of the largest REIT companies in Singapore and has a diversified tenant population in both the retail and commercial space. CICT has made investments in several trade sectors of Singapore such as hotels, supermarkets, banking, and financial services etc. Even during the grave situation of Covid-19 pandemic, the occupancy rate of CICT did not waver significantly. It also has a P/B ratio near 1.0 with a distribution yield of 4-5%. These numbers illustrate the pros of investing in Capitaland Integrated Commercial Trust.


High Yield Companies:

Aside from REIT companies, investing in a company that has a fair and consistent dividend yield is also a good investment opportunity. A prominent example of such a company is DBS Bank. The average 5-year yield of DBS bank since 2016 is 4.32%, with the highest one being 6.75% in 2018.


Step 4: Invest in Value-Growth Companies

Investing in Growth companies at Undervalued prices should be the cornerstone of your portfolio.


The main characteristic which defines Undervalued companies is its market capitalization vs. projected intrinsic value. The market capitalization can be seen as the “price” you are paying to own the company, while the intrinsic value is “worth” of the company. By paying less for what the company is projected to be worth, it is likened to buying a $10 note with just $5 (at a 50% discount).


Conversely, this also mean that you have a 50% margin of safety – the company’s value has to fall more than 50% before your purchase is considered to be overpriced.


The Growth section of the equation comes in when assessing the type of companies to invest in. While many companies might be undervalued at different points in time, many might be Slow Growers or Asset Plays (in the words of Peter Lynch in One Up on Wall Street). With a Slow Grower growing at 2% per annum or Asset Play with no increase in Net Asset Value or Asset under Management, there is very limited upside in the value of the company in the next 5-10 years.


With Growth companies, the Revenue, Free Cashflow or Earnings might be growing at 30-40% a year. This has been the case for the likes of Apple, Google and Microsoft in the past 10 years. This drastically increases the company’s potential to increase its value in the upcoming years and if the company is able to continue its growth rate, the projected intrinsic value of the company will continue to rise.


Hence, the ability to identify and invest in Value-Growth companies is a critical skill set to compound your capital in excess of the market average (10%) over the years. To learn more about Value Investing, I would recommend checking out the following books (Intelligent Investor, Common Stocks and Uncommon Profits, and One Up On Wall Street).


CONCLUSION


With the steps above, I hope you get started to build your emergency fund, start budgeting more effectively, and put your funds to work passively to generate more income to support your financial independence journey.


I will continue to share more and build on my repertoire of strategies to help you and your family move towards financial independence.





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