Get the Basics Right in Investing
Getting The Basics Right
It would not be inaccurate to say that when it comes to investing, most people know what to do but don’t do what they know.
They know that they should take the time to study the companies they are thinking of investing in, diversify to reduce risk and exercise patience by buying and holding, yet in practice, all these principles will be abandoned when fear, greed and panic set in.
Another mistake that is often made is to try and get rich quick, a problem that is most prevalent among the young. A survey by a local bank found that about 48% of those in their 20s and 30s want to retire early and in style. Young Singaporeans (about 18% of those surveyed) are therefore still keen on betting on cryptocurrencies in 2023 despite all the crashes the sector has experienced and despite warnings from the authorities to stay away.
If you are really keen on building wealth through investing, then gambling on cryptos is not advisable, especially if you have limited capital and many financial commitments such as a housing loan and children to raise.
What Are The Main Considerations When Investing?
1. Your investment horizon
How you invest and what you invest in is dictated by your investment horizon, which relates to how much time you have ahead of you to achieve your financial goals.
Those in their 20s and 30s have a long runway ahead of them, which means they have plenty of time to ride out future volatility and earn back losses along the way.
As such younger investors can afford to take on more risk, but this is provided their risk profiles allow them to do so. If this is the case, then their portfolios can comprise more equities, perhaps as much as 70%. The remainder can be 20% in bonds and 10% in cash.
2. Your investment objective - Growth, Income or Security
In formal terms, we say that younger investors can aim for Growth as their main investment objective because they can afford to go for growth-oriented investments. This would be mainly equities or stocks.
As you age and move into your late 30s and early 50s, your investment objective should shift towards generating Income. These would be high-dividend paying stocks and bonds of reasonable investment grade. Such a person’s portfolio could be 40% equities, 40% bonds and 20% cash.
Once a person enters his pre-retirement and retirement phases, which would from the late 50s onwards, the focus should be on Security, which means capital preservation. An older person’s runway is shorter and time to earn back losses is very limited. As such, the investment objective should be to ensure preservation of their savings and nest egg whilst minimising risk.
An older person’s portfolio could therefore be 20% in equities, 40% in cash and 40% in high-grade bonds and dividend-paying stocks.
3. Your risk profile
Your risk profile can be divided into your risk tolerance, which your emotional ability to take risk, and your risk capacity, which is your financial ability to take risk.
For example, someone who earns $3,000 a month may have a high-risk tolerance but is limited by his risk capacity, especially if he has financial commitments. Similarly, someone who earns $10,000 a month may have the capacity to take on more risk but could be limited by his risk tolerance.
It is important for all investors to know their entire risk profile before investing. You can find out more about your risk tolerance by taking the CPF Risk Tolerance questionnaire available in CPF’s website.
4. Know what you’re buying and the costs
It is essential for you to understand all the features of the products you are buying. If a product has been recommended to you by a financial adviser, then he or she has to explain all its features to you, as well as inform you why the product is suitable for you.
If you are thinking of buying a stock, you should familiarise yourself with the company by reading annual reports and the latest analyst recommendations.
If you are buying a unit trust, find out all the fees involved as these can erode your returns over time.
5. Diversify
Last but not least, make sure you build a diversified portfolio. Do this by combining assets that have little or no correlation with each other, so that they will not all be adversely affected by a negative development.
For example, a rise in oil prices will negatively impact transport stocks but probably not healthcare or property companies. A rise in steel prices will hit construction companies but not banks or offshore marine firms.
Past Performance Is No Guarantee Of Future Results
There is no guarantee that following all these principles will lead to large returns – after all, there are no guarantees in the financial markets. However, if you do practise disciplined investing and do not take on disproportionate risk, your chances of building wealth slowly but surely will be increased.
Note:
For free and unbiased financial education on personal investing, you can visit the Institute for Financial Literacy (IFL). IFL provide talks and workshops to the public and do not promote financial products. Their financial education programmes cover basic money management, financial planning and investment know-how.
Disclaimer:
The information presented here is to provide general awareness and educational purposes and does not constitute specific financial or investment advice. Any mention of private or public organisations, reference to products or numbers used, are for the purpose of providing illustrations to help in understanding concepts being presented.
You are always encouraged to consult a licensed financial advisor, relevant government agencies and/or your family before making any major financial decisions.
Credit Counselling Singapore
Published 13 January 2023.