INVESTING YOUR MONEY
INVEST IN YOURSELF FIRST … YOUR BRAIN … INTRODUCTION Investment
is part of your overall financial planning. If you have some savings, you may
want to invest them to maximise your return. This webpage aims to provide you
with some guidance on the factors to consider before investing as well as the
do's and don'ts when investing. DIFFERENCE BETWEEN INVESTMENT AND SAVINGS Investment
differs from savings. In savings,you will generally get back your savings,plus
some interest. However, in an investment, you may or may not get back the sum
invested or you may get much more than the initial amount invested. The
potentially higher return is to compensate you for the higher risks undertaken
by you. PLANNING YOUR INVESTMENTS Smart
investments are not a matter of luck, but a result of careful planning. When you
invest, you should not rely on hearsay. You must spend some time understanding
the market, either through research or seeking out expert advice. Below are
some of the issues you should be aware: Step 1 – Know why you want to invest Before
you invest, you should know the purpose of your investment, that is your
financial goals and objectives. Your
financial goals may be to: ·
Buy a car ·
Purchase a house ·
Send your children for higher
education ·
Go for a
holiday ·
Plan for a comfortable retirement
in the future Your
investment objectives can be either to: ·
Maintain the purchasing power of
the principal amount invested ·
Obtain income from your
investments ·
Grow your net worth ·
A combination of any of the above You
can achieve your goals by investing your savings based on the time frame when
these financial goals can be met. Also, it is important that your investment
plans fit into your overall financial planning objectives to get the best
possible results to achieve your financial goals. Step 2 – Know the key issues to consider when investing As
investments are long-term commitments, you must consider your ability to invest
before you commit yourself. Among the key issues to consider are: ·
How much money do you have for a
medium to long-term commitment? ·
Do you fully understand the
product that you are investing in? ·
Does the intended investment fit
into your overall portfolio? ·
Have you
compared returns on other similar investments? ·
Do you
understand the risks involved and do you know your tolerance level for loss?
(i.e. how much changes in the price/value of your investments can you tolerate) ·
What are your expectations
towards returns on your investments? (i.e. how much returns will you be
satisfied with) ·
What is your time horizon for the
investment? (eg. 5 years, 10 years, etc.) ·
Do you have the flexibility to
sell the investment in the event of emergency? ·
How can you monitor the
performance of your investments against your changing needs? Step 3 - Know the concepts of investing Diversification A
proven strategy for successful investing is diversification – to vary your investment.
Diversification is an effective way of minimising risks and protecting you from
volatility in a particular asset class or industry. Different types of
investments are exposed to different risk and by diversifying, the losses in
some investments can be offset by other investment gains. Time Value of Money Time
is the greatest asset for anyone who wants to invest. The earlier you invest,
the greater is your return on the value of your money. This is due to the
concept of compound interest where you will earn interest on your original
investment and the interest earned. Even one percentage point can make a
difference in the long run. The chart below illustrates how RM1,000 investment
will grow over a period of 40 years with different rates of return.
Impact of Inflation and Taxes Proper
planning and ensuring a minimum average rate of return on investment in the
longer term is also crucial as the money you have today may not be able to buy
you the same amount of things in the future. This is because inflation reduces
the value of money. Although you may earn a return on your investments, the
actual value of your investments may be reduced due to the effect of inflation.
The investment goal is for your money to grow above the rate of inflation. Tax will
also reduce your return on investment unless your investments are tax exempted.
Therefore, you should invest in an asset which allows you to get the best
return after taking into consideration the effect of taxation and inflation in
the longer term. Maximising Returns As an
investor, you will always try to get the highest return on your investments.
The time needed for your money to double can be calculated using the Rule of
72. Divide 72 by the rate of interest you earn on your savings. If the return
calculated is unsatisfactory, you may consider other options that pay a higher
rate of return. Ringgit Cost Averaging "Ringgit
cost averaging" is a technique widely practiced in the unit trust industry.
It involves investing a fixed amount of money for specified interval such as
monthly, quarterly or yearly regardless of how the stock market performs. When
fund prices are higher, the additional money invested will buy fewer units but
when prices are lower, the same amount of money allows you to buy more units.
Implicit in this approach is that at some point in time, markets will recover
as they move in cycles, at which time profits can be taken. Risk-Return Relationship There
are many types of investments in the market and each has a different level of
risk and expected return. Certain types of investments (e.g. savings bond) tend
to be"safer" than others, meaning your original investment is
preserved but the rate of return may be lower. Investments which promise higher
returns (e.g. equity unit trust or shares) will also have higher risks. As a
result of the risk return trade-off, you have to consider the level of risk
associated with different types of assets and choose the appropriate asset to
invest. Understanding
Risk Risk
is an indicator of expectation about the potential gain or loss associated with
investing over time. If you expect to make a large gain in a short period of
time, the risks would be high. However, if you prefer long term investments,
the level of risk would be lower. As the time period of an investment becomes
longer, the variation and volatility in returns tend to be lower. Step 4 – Know which investments are appropriate for you Before
you select any investment product, it is important that you understand how it
works. Each asset is unique and has a different risk-return profile which you
can invest in to realise different financial goals. However, it is important to
realise that negative return is possible for most investment types. The graph
below shows the risk-return of various types of investments:
FINANCIAL PLANNING AND LIFE CYCLE STRATEGIES The
amount of money to be invested in various assets depends on: ·
Your goals and needs – to buy a
house, travel or retirement needs ·
Your age at the time of investment
– this will decide how much risk you can take. For instance, if you are young,
you can invest in relatively riskier investments. ·
Your income at the time of
investment – if you earn more, you will have more money to invest. The level of
wealth will also influence the types of investments you can hold. ·
Your
occupation – if your job provides retirement plans, you may not want to have a
separate retirement plan · Time
horizon – when do you want to sell your assets? ·
Liquidity – how fast can you
convert your assets into cash? ·
Tolerance for risk – how much
risk are you willing to take? Different
individuals have different background and will have different considerations
when deciding on an investment strategy. You should select your investments
based on your own circumstances. A common method used in deciding the
investment strategy is the 'life cycle approach' which is based on the financial
periods of the investor during his/her life:
WHAT IS YOUR RISK PROFILE? When
determining your risk profile, ask yourself the following questions: ·
What stage are you at in your
life? If you are young, generally, you can afford to take greater risks with a
view to obtain higher returns in the longterm. If you are older, security will
be an important factor. ·
Is your goal
short-term, medium-term or long-term? In general, if you have a long term
investment horizon, you can afford riskier investments. However, if you need
money for a down payment on a house in two years time, you should not invest in
high risk assets. ·
What kind of
'money personality' do you have? Some people are risktakers and some are not.
Therefore, understand your attitude towards money and risk, before making any
investment. ·
Are you willing to accept
short-term movements in the value of your investments? If watching share prices
go up and down upsets you, you should limit your share investments until you
feel more comfortable with it. ·
Are you prepared to accept higher
risks for greater returns? Generally, no risk means lower return, so try to
find a balance you are comfortable with. GETTING FINANCIAL ADVICE There
are a number of parties offering financial advice, e.g., banks, remisiers, financial
planners or insurance agents depending on the types of investments involved. However,
before you choose your financial adviser, ensure that the person is suitably
qualified to give any advice. SOURCES OF INFORMATION Information
on investment can be sourced from: ·
Published reports of the company ·
Newspapers, journals and
magazines ·
Internet ·
Courses ·
Seminars PROTECT YOUR INTERESTS For
any investment you make, keep in mind the following tips: ·
Understand the investment and the
risks involved ·
Select financial advisers
carefully if you are engaging one. Ensure that they are qualified and
experienced. Ask questions and make sure you understand the issues and
procedures involved. Seek second opinion should you have any doubts. ·
Don’t be pressured into making a
decision. Watch out for aggressive sales tactics that urge you to decide and
act hastily. ·
Keep records of all transactions
you enter into. ·
Be wary of schemes which
guarantee a quick profit with minimal or no risk THE DON'TS IN INVESTMENT There
are some practices that you should avoid when making investment decisions to
minimise the risk of making a loss: ·
DO NOT borrow to invest – You
should not take other people's money to invest or take out cash from your
credit card. If you do not have money, do not invest. ·
DO NOT invest just to get quick
and high return – Quick returns always carry high risks. Always be cautious of
illegal get-rich-quick-schemes that promise quick money for your investments.
They make false promises and may run away with your money· ·
DO NOT invest in high-risk
investments unless you are ready for it – Some investments involve a high
degree of speculation and risk (eg. futures trading). ·
DO NOT invest on the basis of
'hot' tips and rumours. CONCLUSION One
should not enter into any investment decision in a hasty manner. A smart
investor must proactively seek information on the various investment options
available. He or she must also be sensitive to the prevailing investment
climate and market conditions. Investors must always remember to exercise prudence
when it comes to making an investment choice and decision. (bankinginfo) |
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