Let’s assume you’ve amassed a modest sum of money from the amount of savings that you’ve set aside every month (presumably at least 10% of your monthly salary). What then do you do with it? Go for a holiday with the money? Buy the pair of shoes you’ve always wanted? Treat yourself to that expensive buffet at Shangri-la? If you’re thinking of all these…….. give yourself a slap in the face NOW. You should know by this time that all those items mentioned should be taken either from your living expenses budget, or your frivolous spending budget a la Miss Lala but NEVER from your savings/investment budget.
How then do you go about investing your hard-earned money? Before we get to there, you need to ask yourself a few basic questions. These questions form the basic plan of your investment strategy.
(A) How much risk am I willing to take to grow my wealth?
Investors are rewarded for the risks that they take; risks and returns are positively correlated – they higher risks you take, theoretically speaking, you should be better rewarded. If you are not the type who can tolerate a single bit of loss to your original capital, then be prepared that the relatively safer investments that suit your preference will not give a return as attractive as one that could potentially require you to suffer a loss. As a very general rule of thumb for the layman —> high risks, high returns; low risks, low returns.
(B) Self managed or professionally managed?
Do you prefer to manage your own investments or leave it in the hands of someone else? You may think that to have your investments professionally managed, for example, via investment in unit trusts, sounds like the right thing to do. But do consider that you will then have absolutely no say in how the fund manager manages your money. Some folks, such as my supermarket supervisor, prefer to take a more active role in money management by learning more about how to invest.
(C) What is my investment horizon?
Typically, the longer your investment horizon, the higher the likelihood that you would be able to ride out market volatility (yes, another new word…. it simply means the ups and downs of price movements). In terms of interest income, a longer investment horizon would entitle you to a more attractive rate – as a very simple example, you would have noticed that if you placed a fixed deposit with a bank, it gives a higher interest rate for a longer dated deposit than for a short dated deposit.
Generally, do not expect your investments to grow by leaps and bounds in the short span of say, over the next 6 months. Remember, there is always a trade off between risks and returns. That’s what they mean in finance by no free lunch.
(D) Amount of investments
The amount you have also play a large role in determining what type of investment is suitable for you. For example, some folks favour property investment; but do bear in mind however, that property investments require a large sum of capital as downpayment. So in the interim, while you are building your reserves, you might want to consider other forms of investments that may not require you to take a capital loss.
Next blog entry, Aunty Scroogey will be elaborating on market risks, credit risks, etc for better understanding of the type of risks that appeal to your appetite. So stay tuned!