There is no magic formula to investing. You may or may not get back the sum invested, or you may get back much more. Smart investing is not about luck. It is about careful planning and time spent understanding the market, either through research or expert advice. This article helps you start off on the right note:
What is your investment goal? Is it to obtain income from your investments, grow your net worth or maintain the purchasing power of the principal amount invested?
Your investment goals should fit into your plans to achieve your financial goals – whether it is to buy a house or pay for your child’s education.
UNDERSTAND KEY ISSUES
Because an investment is a long-term commitment, you need to first consider these questions:
- How much money do you have for a medium to long-term commitment?
- Do you fully understand the product that you plan to invest in?
- Have you compared returns on other similar investments?
- Do you understand the risks involved? What is your tolerance level for loss?
- How much returns will you be satisfied with?
- What is your time frame for the investment?
- How can you monitor the performance of your investments?
- Diversification. Different investments carry different risks, so vary your investments to minimise your risk.
- Time value of money. Compound interest means the earlier you invest, the greater your return will be.
- Inflation & taxes. Inflation and taxes reduce the value of money. Invest in assets that bring returns even after the long-term impact of inflation and taxes.
- Maximising returns. Calculate how long it takes to double your savings by dividing 72 by the interest rate on your savings. If your interest rate is 4%, it will take you 18 years to double your savings (72 divided by 4 = 18). Consider other options if the calculated return is unsatisfactory.
- Risk-return relationship. Different investments have different levels of risk. A savings bond has lower return but is “safer” than equity unit trust or shares which promise high returns at higher risk.
KNOW WHAT FITS YOU
Fully understand the investment before committing yourself. Negative returns are possible, so be prepared. Do not hesitate to ask your investment planner if there is anything you are unsure about.
- Do not invest in get-rich-quick schemes with minimal risks. Most are illegal.
- Do not borrow money or take out cash from your credit card to invest.
- Do not rely on hot tips and rumours.
- Do not be pressured into making a decision.