On Investing

— 15 minute read

A while ago, I posted about trying out BukaEmas on Instagram. I've also tweeted some things regarding investments. Since then, many have asked me about what kind of investments I do and how I decide which investment to do. I’m considering to write more about investing because many people have asked me about it, and really, your money can be worth a lot more if you don’t let it sit around in your bank account (or worse, in your old-style literal piggy bank). I think this is something that most people haven't realized yet, & I really really want to share this with you all because I'm sure everyone can actually do this too!

Disclaimer: I spend most of my time coding so I'm definitely not an expert in this. This post is basically a summary of what people have asked me about, what my mother has taught me over the years over coffee & bowls of Vietnamese pho (this is like her thing so y'all can trust her on this one), some personal experiences & some accompanying links to make cross-checking (please do! I might have made some mistakes) easier for y'all.

Why do I have to invest my money? Why now and not later? permalink

There are plenty of reasons why, but here are the reasons that stick with me the most:

  • Inflation. Inflation is what happens when prices for goods and services rise, & when it happens, while your income will be adjusted according to inflation, the savings that you have aren't going to adjust itself. Therefore, inflation is going to eat your money if you let your money sit around doing nothing.
  • These graphs, courtesty of Business Insider:
A picture of a chart that shows how compounding impacts the amount of savings after a long term. A picture of a chart with two lines: the first line illustrates a person who starts investing at 35, while the second line illustrates a person who starts investing at 25. By the age they're 60, the first person only has $200.000 while the second one has $400.000. A bar chart that illustrates how much you need to save per month, as you age, to reach $1M at retirement (with 6% return rate).
Thanks to compounding, the earlier you start investing, the greater the impact is to the amount of your savings.

This is all made possible with the power of compunded interest, which you can read all about here! The nice idea is that, by starting early, even when you're not investing much, you're going to be able to reach the same amount of money as someone who is starting way later than you--yes, even when they're investing a much larger amount than your initial investment.

How do you invest? Stocks, mutual funds--oh my! permalink

Here’s a quick roundup on the investments I use:

Mutual Fund permalink

What is a mutual fund?

What is a mutual fund? A mutual fund is a vehicle for pooling public funds for investment in a portfolio of securities managed by a fund manager[1]. Instead of investing your money directly yourself by buying stocks on your own, for example, you instead let a fund manager take care of that for you. This is very convenient when a) you don't have much money to start with, since sometimes you need a bigger amount of money to start buying stocks directly; b) you don't really have the time and/or expertise to do all this on your own[2]. Both of these reasons are true in my case—I don't have much capital to begin with, I don't have time to trade stocks all day, & I don't have the sufficient knowledge to do all this on my own. So mutual fund it is.

What mutual fund do you use and why?

This was actually from a long time ago, but I set up my mutual fund through Bank Mandiri, using Ashmore Dana Progresif Nusantara. The type of mutual funds I chose is called equity fund, which is a type of mutual fund that invests at least 80% of its portfolio in stocks (also called equities). It lets you to start investing with Rp100.000,-/month, so it’s quite affordable.

Equity fund? Are there other types mutual fund aside of equity fund?

Aside of equity fund, there are other types of mutual fund such as fixed income mutual fund and balanced fund. What are the differences? You can read about them here, but to put it simply, they're different in terms of how they invest their portfolio. For example, balanced fund invests in a mix of equities, fixed income instruments, & money market instruments instead of only equities.

Now, these different types of mutual funds come with different risks. Money market mutual fund, for example, tends to have less risks than equity fund because they invest in low-risk vehicles such as certificates of deposit. So to understand the risks, you have to first understand how they invest their portfolio.

One thing that you have to remember is this: high risk, high return. The higher the risks of the investment, the higher the return will be. Choosing low risk mutual funds might not yield a much different result than, say, deposits. But of course, this doesn't mean that you get to be reckless in order to gain more return! You have to understand the risks first & choose the one that suits both your situation & expectation of the return you will get.

To find out more about each type of mutual funds and the risks that come with each of them, you can read this article which also explains how to choose the right mutual funds for you.

How long do you invest in mutual fund for? Will I get filthy rich in a month?!?!

This was one of the first questions I asked my mother! I thought I could fund my graduation trip just by investing in mutual fund for a few months, but boy was I wrong! Well, some types of mutual fund—such as equity fund which is the one I'm using—is a risky investment when it comes to short-term investments (say, you're trying to fund your graduation trip to Machu Picchu in a few months)[3]. Putting it simply, you need to give it more time for it to actually give you a meaningful return. Otherwise, you might not get much return or even gain losses, which isn't really fun.

This might be a very, very simplified explanation of what's going on, but this is the explanation from my mother that really made me understood why equity fund doesn't work for short-term investments: say that I'm starting to invest in equity fund today for my graduation trip to Machu Picchu[4], which means that I'm going to get my money in, say, four months. What you need to know about equities is that they are volatile for a number of reasons[5], so it's possible that when I'm getting my money back, the graph looks like this:

A picture of a badly drawn line chart that shows what happens when you invest in equities for short-term. The market is volatile, and there's a large chance you're buying at a high price and have to sell at a low price.
The market is volatile, and there's a large chance you're buying at a high price and have to sell at a low price.

... which is not pretty. :(

Meanwhile, when you're investing long-term, as the market goes up the graph will pretty much look like this:

A picture of a badly drawn line chart that shows what happens when you invest in equities for long-term. The market is volatile, but as time goes on the market goes up, you're more likely to be selling at a higher price.
The market is still volatile, but as the market goes up, you're more likely to be selling at a higher price.

As you can see, they're still volatile, but the trend is increasing if you give enough time. Here's a nice article outlining why the stock market always goes up.

So, even if 20 years down the road your investment ends up in a local minimum, it is most likely still going to worth more than the initial money you invested in the beginning.

In my case, since my purpose is a long-term investment (which means that I'm not going to touch my mutual fund until the next 20 years, perhaps, or even more!), equity fund is suitable for me.

Is it free?

Well you know what they say: there's no free lunch, so investing in mutual fund is not free either. Remember, you have a fund manager taking care all of this for you, which means there are a bunch of people trying to make sure that your money is doing well in their hands. It makes sense that you must pay for them in some way, right? That's why there are fees, & for clarity I'm not going to explain each of them one by one but they're all explained here.

Having familiarized yourself with all the fees, remember to take all these fees into account when calculating the return. Otherwise, all these fees might probably take so much of your potential returns, and your potential returns won't mean much anymore!

Gold permalink

This is the one I’ve just begun to regularly do this year, particularly because BukaLapak has just released BukaEmas.

Investing in gold used to be quite a hassle. Why? Using the conventional way of buying and selling at the gold seller, you definitely can't do it with a mere Rp50.000,-. Plus, you need to physically go to the gold seller bringing the blocks of gold on your own, which doesn’t sound secure, does it?

With BukaEmas, whenever you get the news that the price goes up and you want to sell, you can do it with just a few clicks. No more missed opportunities because you’re too lazy/you can't go out (which seriously happens a lot. Watching the price rises THEN drops again with you not being able to do anything is the worst. Feeling. Ever.).

Stocks permalink

There are a few ways to do this, you can trade by day or you can just buy blue-chip stocks and leave it there. I do the latter since I don’t have the time to do daily trading & don't have enough capabilities to do a thorough technical analysis... yet. :P

Blue-chip stocks are stocks of established companies that have operated for many years. Most of the time this means that these stocks have survived various market cycles, which make them perceived as safe investments for most people (though this is not always the case!). Examples of blue-chip stocks in Indonesia include Unilever (UNVR), BCA (BBCA), & many more.

Aside of blue-chip stocks, there are many other types of stocks as well. One type that we perhaps hear a lot is saham gorengan. Saham gorengan are stocks that are not suggested for beginner investors like me, because of its high-risk and rather unpredictable nature. Read more about saham gorengan here.

I use Mandiri Sekuritas and trade my stocks through Mandiri Online Securities Trading (MOST).

How frequently do you invest your money? Is it a routine thing or do you just do it when you suddenly have tons of money!? permalink

There are different strategies to invest which depends on your purpose & situaton as well as the market situation. The strategy I'm using is called dollar-cost averaging (or well, I guess in this case you can call it rupiah-cost averaging, haha). Putting it simply, I invest a fixed amount of my money at regular intervals without regard of the current prices. For example, I always buy stocks & gold for a certain amount of Rupiah every month regardless of the price.

This means that when prices are low, I'll get to buy more shares & when prices are high, I'll have to buy fewer shares. This way I don't need to worry about how the market is doing (well unless something really, really peculiar happens), & just let the market average my investments (the low prices making up for the high prices).

Another strategy is called lump sum investment. With lump sum investment, you're investing a large amount of your money at the same time. This might be more profitable than dollar-cost averaging if the markets are trending upward, because it lets you to take advantage of the growth right away. Yay high returns!

However if you just want to minimize your risks and you aren't too worried about getting profits right away, dollar-cost averaging might be right for you.

How do you decide how much money to invest? permalink

The rule-of-thumb that I use is: invest 10% of your regular income at the minimum. Deciding which investment is another matter & can be unique to each person. It depends on your plan, such as whether you’re investing for short term or long term and what you’re going to use the money for. Is it for a round the world trip ten years down the road? Or for your retirement when you turn 50? Yep, it does require an extensive planning, but it pays (pun intended) off.

Why do you invest in all those three instead of just one (say, mutual fund only)? permalink

The answer, my friend, is in this video:

Okay, serious answer:

Diversification is basically putting your eggs in different baskets. You can diversify your portfolio from diversifying your stocks (e.g. choosing different industries of the stocks you're buying) until diversifying your investments (e.g. having both stocks and gold in your portfolio). The point is to have really, really different investments that should anything happen to one of them, you know that it's not going to affect your other investments because they're not correlated to each other.

For example, I choose to add gold to my portfolio because it tends to go up when everything else goes down. Say that the stock market crashes, I can at least minimize my risks by having gold make up a certain percent of my portfolio.

I want to learn more about all this stuff! permalink

If that's the case then HOORAY, so glad for you!

Here are some links that might help:

  • Investopedia: good for high-level concept understanding. Most of the time they also have examples to make things easier to understand.
  • Kontan: I know this looks boring af, but it's very good if you want to have an overview of how the market's doing.
  • Wu-Tang Financial: this one is my favorite hands down.

PHEW permalink

Okay so this is getting MUCH, MUCH longer than how I intended it to be & the footnotes are making this look like a chapter out of a David Foster Wallace novel so maybe I should stop here.

If you have some spare time you can read the links & the footnotes I've given throughout the post. I learned from them as well. There are so many things I left out for clarity's sake, but I'm trying to make things as concise as possible but I hope the accompanying links explain! If not, money return guaranteed. Just kidding!

You can shoot me a question & I'll try my best to answer—if I can't, I'll relay them to my mother (please don't hesitate to do this because I won't mind & she won't mind as well, I love learning this kinda stuff so I'll definitely ask her & bother her with this until I have my answers!). Please let me know if you have any correction too! I'm still learning so I might have made some mistakes.

Happy investing! <3

  1. Mandiri - Consumer Banking - Mutual Fund ↩︎

  2. However, I still think it is important to understand what mutual fund is, how it works, & what are the risks. ↩︎

  3. Berpikir jangka panjang — Investasi Reksadana — Schroders ↩︎

  4. Can I get an amen!?!? ↩︎

  5. Why Equities Are Likely to Be Volatile - Market Realist ↩︎