Why are you investing?
Simple, placing money in FD or CD offered by your local bank just won’t provide you the higher returns that you expect (FD offers about 3-3.5% annual return). We are all looking for ways to increase our wealth, sense of freedom, sense of scurity and ability to afford the things we want in life. All these requires a tool that is known as money, and how can we have more of it? Investment.
Investing isn’t your typical get rich quick scheme, it requires effort to have total control over your finances and making sure you’re allocating in the right “vehicle/banking products” to ensure they multiply, thus giving you a better return and expanding your wealth.
If you’re lost or a newbie in investment, this article will help you get started.
There are many ways to make your money work for you in investment, this includes putting your hard earned money from your 9-5 job into stocks, bonds, mutual funds, or real estate, or even starting your own business.
People often refer to the above as investment vehicles, which is another way of saying your way of investing money.
Misconceptions of investing
Investing is not gambling, we do not risk putting our money into something that has an uncertain outcome with the hope that you might win more money.
Part of the way people can turn investing into gambling is by placing their money into some investment vehicles based on a “hot tip” that they have heard from friends, strangers or media.
A true investor does not simply throw his/her money at any random investment. He/She performs thorough analysis and commits capital only where there is a reasonable expectation of profit.
Power of compounding interest
Considering two individuals who are investing a fixed amount of (RM 20,000) into an investment vehicle which guarantees an annual return of 10%.
Person A invest his money at this age of 20 would have a higher return on investment (ROI) than Person B who invested the same amount at the age of 30.
Moral of the story is: Start investing your money early. For young investor, take advantage of your youth so that you can reap better financial rewards in the future.
Peter Lynch, one of the greatest investors of all time, has said the the “key organ for investing is the stomach, not the brain”. You need to know how much volatility you can stand to see in your investments. As the old invest maxim goes: You’ve taken on too much risk when you can’t sleep at night because you are worrying about your investments.
Investing strategies
There is no one correct method to go about investment.
Person A may believe that the key to investing is buying small companies that are poised to grow at extremely high rates. Therefore he is on the lookout for the newest and most cutting-edge technology, and typically invests in tech and biotech firms.
Person B isn’t ready to spend his hard-earned money on what he sees as an unproven concept. His key to investment is buying a share in companies who has solid track record and selling at relatively “cheap” prices. The ideal investment for him is a mature company that pays our large dividend, which he feels has high-quality management that will continue to deliver excellent returns to shareholders year after year.
Person A is a growth investor while Person B is a value investor. They both have different investing strategies. Each strategy has its merits and may have aspects that are suitable for certain investors. For the average investor, understand and analyze the information about the company that you have on hand, then decide whether you should proceed with buying a stake in that company.
What are the type of investments?
1. Bonds
Grouped under the general category called fixed-income securities, the term bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.
The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities. (The Bond Basics tutorial will give you more insight into these securities.)
2. Stocks
When you purchase stocks, or equities, as your advisor might put it, you become a part owner of the business. This entitles you to vote at the shareholders’ meeting and allows you to receive any profits that the company allocates to its owners. These profits are referred to as dividends.
Stocks are much more volatile than bonds. They fluctuate in value on a daily basis. Some stocks pay dividends and some do not.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential where you must assume the risk of losing some or all of your investment. (In the following blog posts, we will talk about stock basics tutorial and guide to stock picking strategies.)
3. Mutual Funds
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc.
The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself. In reality, there are some aspects about mutual funds that you should be aware of before choosing them, this will be discussed in the next post about mutual funds.
4. Options, Swaps, Futures, FOREX, Gold, Real Estate.
They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don’t know what you are doing, you could get yourself into a lot of trouble. Experts and professionals generally agree that new investors should focus on building a financial foundation before speculating.
Building your portfolio
A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor’s goal(s). Items that are considered a part of your portfolio can include any asset you own – from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, we will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents.
It all centers around diversification. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.
There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it’s really just the simple practice of “not putting all your eggs in one basket.” If you spread your investments across various types of assets and markets, you’ll reduce the risk of catastrophic financial losses.
Conclusion
If active investing is too time consuming for you and you do not want to entrust your money to an active fund manager (mutual fund). You can always consider placing your investments in an index fund. Which in my opinion, is the safest way to guarantee a better rate of ROI. (More about index funds next time!)
Indexing in the long term doesn’t do any damage. There are plenty of ways to lose money, whether in speculative investments or through excessive fees in mutual funds. On the other hand, it’s possible to be too risk averse. If you put your savings under a mattress, we guarantee it’s not going to increase in value.
There are many other alternatives out there. We strongly encourage you to explore them and see what works for you. But, for the average investor, the smart route includes saving regularly, keeping investment expenses down and being in the market for the long term. Whatever you do, keep the principles we’ve discussed in mind, and never stop trying to learn more.
Life of a Malaysian entrepreneur 