First, what is investing? At its core, investing is the practice of spreading resources around in ways that attempt to best prepare for a financial future that is largely unpredictable. In the investing world, the more diverse your resources, the more likely you are well-prepared for life’s unpredictabilities. Diversification allows us to survive the losses that come our way. Investing takes effort and appropriate consideration beforehand. You need to be knowledgeable of the nature of investing and you need to gain a good understanding of the opportunities open to you, such as the different investment account options and the different types of investments to choose from. You need to decide what to invest in and understand who you may be pitting yourself against, i.e. who is bidding against you to stock shares in a company. Make sure you get the right company investment information and use it! Without this research, you will become more dependent on external investor sources.
What is Investing?
The general synonym for fear is usually the word “investing,” perhaps because it is one of those financial wonders that Americans either struggle to understand or are terrified to think about. Yet, investing is the one component of personal finance with the power to restore our financial options. Through investing, a small effort and a little money can magnify to become a giant debt-paying, retirement financing force, with the potential to make most financial dreams come true. But before these big planners can actualize this potential for the future, those in debt need to accomplish the most basic lesson there is about investing: get into it and stay there.
Investing is the process of making your money work for you rather than you working for your money. It is the act of devoting time, effort, or money to achieve a desired result, and failure is not achieving that result. The desired result is growth over time in assets, such as purchasing power, provided by a sure and consistent rate of return. Another way to look at it is being able to make money when you sleep, sit poolside in Maui, or your kid’s Little League game. Any investment should accomplish this desire, as when an investment is made, money is usually exchanged for something else. It could be a stock, a bond, a mutual fund, or any sort of asset that is expected to deliver future returns. These returns could take the form of interest, dividends, or capital gains. Interest, as made when a deposit account is opened at a bank, is the rental paid for borrowing money.
Benefits of Investing
There are several reasons for a person to consider investing rather than merely putting their money in a traditional savings account or into a government bond paying 3% to 5% interest. In contrast, several opportunities are available to the investor in the investment world that will generate returns in excess of 5%. Indeed, if one is savvy enough and is willing to take on additional risks, then he/she could potentially see their investment return several times in a year. However, the benefits of investing are not only confined to the pursuit of high returns. They also include:
Inflation Protection: Inflation is defined as the general increase in prices, and it erodes the purchasing power of a currency. As one knows, their grandparents could buy a whole meal for a few cents but that isn’t the case today. The same amount of money could not buy the same meal. Therefore, people’s money would be worth less if inflation is rampant. Right now, the bank is offering all of their clients a loan at 6%, just so this couple could keep in lockstep with the cost of living, since it is virtually impossible to do so nowadays. Yet, if people’s deposited funds remain subject to inflation, then the bank’s 6% interest rate becomes meaningless since the couple’s purchasing power would remain constant.
Understanding Risk in Investing
Risk is generally bad when it comes to investing. Nobody wants to suffer losses. However, all investments come with risk. Understanding the risk associated with an investment can help you make a more informed decision. For example, simply understanding that real estate is generally more expensive and time-consuming to sell automatically makes it a less popular trading choice. Stocks are generally more volatile than bonds. Short-term United States Treasury security returns tend to be less risky than long-term, but the return is generally less. But no matter which investment you choose, the idea is to identify the state between risk and return and use that information to make an educated decision. Not too risky, not too low rewards.
To drive this point home on risk, it’s important to understand what is often touted as a rule of investing. Never invest money that you cannot afford to lose. This is a rule that has been hammered into the heads of investors the world over. But isn’t risk meant to be avoided? How would anyone knowingly want to lose the money they have put away? The key to this rule is not fear but a reflection of the goals of investing. If a person is investing with defined returns in less than three years, then that person should probably not be investing in a stock. If an investor needs access to their money quickly, an emergency fund is going to offer relatively fast access to those funds without fear of losing potential earnings on long-term commitments. The money you are investing is money that you will not need for long-term reserves.
Types of Investment Risk
Investing involves taking risks. The principle is, the greater the potential return, the greater the risk involved. However, the size of the risk is not the same for all risk factors involved in investment. In fact, the magnitude of the risk is not even the same. In general, the three main types of risk involved in investing are as follows:
Market Risk: This is the risk that the value of an investment will decrease due to a change in the value of the market. Thus, it is similar to General Economic Risk. Market Risk affects the value of a security in relatively the same direction as the market as a whole. Market risk can be reduced through, for example, good diversification among different asset classes.
Business Risk: It is the possibility that the firm issuing the security will enter bankruptcy. It is determined by the capability of the business: if the assets owned by the business are relatively stable and able to generate a reliable income stream over time, the company is a low business risk investment.
Inflation Risk: It is the possibility that the returns on the investment will not keep up with the inflation of the economy. It is accurate to say that the risk comes from the decreasing purchasing power of a typical cash flow that the investment provided.
These are the principal types of risk when investing in stocks. However, other types of risk should also be taken into consideration, as they are universally applicable. The most common of these is the Political risk and the Risk due to mentioning among others.
Strategies to Overcome Fear of Losing Money
Paper doesn’t seem scary now compared to the possibility of losing our money, does it? That’s right, fear of losing money is a very real issue surrounding investing, and no less than 47% of Americans struggle with it, according to the North American Securities Administrators Association. It is also one of the biggest deterrents when beginning to invest in the stock market. The positive news? It’s normal to experience this fear, and there are strategies to overcome it.
Here are some strategies to help overcome the fear of losing money when investing:
1. Prepare yourself for a long-term mindset: One of the simplest ways to accept the possibility of losing money when investing is by understanding that it is a long-term game. Accepting volatility and the possibility of losing money will make the stock market a less frightening financial prospect.
2. Establish financial goals to work towards: An emergent reason to be afraid of losing money is when one has never established financial goals with their money. Without a sense of clear financial direction, our minds will start to assume the worst-case scenario, also life scenarios where money is missing.
3. Research and educate yourself on strategies to stem losses: Sometimes the scariest looking figure is the one you do not understand. Knowledge is the light that will expose these ghostly figures lurking in the dark. Hedging a portfolio is a way to protect oneself from the possibility of losing money.
Educate Yourself
The S&P (Standard and Poor’s) 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most widely followed equity indices and is considered to be one of the best representations of the U.S. stock market. Other indexes include the Dow Jones Industrial Average, the NASDAQ, the Russell 2000, and the Wilshire 5000 among others.
There are a number of different investments. Stocks, bonds, index funds, and mutual funds each offer unique benefits and risks. It is important to know that all investing is risky. The potential for gains and the potential for losses is the balancing act that all investors face. There are no guarantees that you will receive a return, an investment may lose value, and there are investment fees. However, it is important to recognize that there are also no guarantees for putting money in a savings account either. Only four percent of financial experts believe that putting money into a savings or money market account will outperform investments in the stock market over time.
It is important that you explore your available options and make the decision that is the best for you. Consider diversifying your portfolio by investing in different types of assets. This will help to manage your risk. Remember, you are taking steps to prepare for a successful financial future.
Goals: What are your financial goals? Are you planning for your retirement or considering investing for a shorter term goal, like purchasing your first home? Be specific with your goals and the length of time over which you would like to invest. Knowing your time horizon is very important as this will help you to determine the types of investments that make sense for you, your risk tolerance, and subsequently the amount that you contribute to your investment accounts.
Start Small
As much as I am a fan of index investing, which usually requires larger sums of money to get started, I am a bigger fan of starting smart and the smartest thing to do is to actually get started. So if you have a small sum of money that you are comfortable parting with, there are a few options for you in Malaysia. Fundsupermart has a fund named Money Market that requires you to invest only RM 1000 for the initial purchase and the minimum additional investment is RM 100. The fund manager for this fund is Pacific Mutual (an established well-known unit trust institution in Malaysia). Additionally, it is an index fund which means that there are no active management fees (AMF) and no switching fees. In comparison, the other (non-index, actively managed) Pacific Mutual Money Market trust also requires only RM 1000 as initial investment but you have to spend RM 500 for additional investments. This also means that if you want to invest a sum of money that is less than this amount, you won’t be able to do so.
If you are interested in investing in gold, Public Bank has a fund named PB Europe Gold Fund which currently requires you to spend RM 600 only for the initial purchase. Alternatively, Kenanga Investors Berhad has a fund named Kenanga Gold Fund which requires RM 1000 for the initial purchase. Do note that the reason for having to even invest 1 level higher is because these two funds (like most funds) charge a fee known as the sales charge. The funds that I will be mentioning henceforth are those that have no sales charge, are index funds, and allow the smallest investments. I’m guessing if you’re reading this page, you’re earning an allowance and you’d likely not want to part with an additional 6% of your money before your investment even has a 50% chance of breaking even. So basically, sales charge-free funds that have low investment fund sum requirements are definitely the most logical option for a beginner.
Diversify Your Portfolio
In contrast with investing in a single stock, diversification is a risk-management strategy that boils down to the old adage of not putting all your eggs in one basket. Simply put, diversification is the most important factor in reaching long-range financial goals while minimizing the probability of losing money. Since investment return is related to risk, lowering the risk associated with an investment delivers a return more in line with the risk assumed. The increased level of portfolio diversification can lead to a reduction of risk relative to the risk in a single asset. By introducing into the portfolio a collection of assets with dissimilar risk or return attributes, problems within one asset can be offset by the performance of another asset.
Further, risk reduction is optimum at about fifteen stocks in the portfolio and there is a negligible impact on portfolio risk beyond a fifteen-stock portfolio. Therefore, a diversified portfolio can offer superior risk reduction benefits. But what is perhaps less well understood is the powerful effect that diversification has in reducing investment risk amount portfolio assets. After all, investment gain is directly proportional to the willingness of the investor to assume investment risk. The reverse is also true. The higher the risks, the greater the losses. Diversification is the single most powerful choking tool managers can use to ensure they don’t have all their eggs in one basket.
Set Clear Goals and Timeframes
Putting down investment goals and timeframes in writing is a powerful exercise, and the list of your financial needs, wants, and wishes should be detailed to the greatest extent possible. You can then place your needs, wants, and wishes in order of priority. This creates an absolutely fascinating exercise that can only lead to good things. The process is both practical and necessary. When one sits down to draft these goals and objectives, it often ends up looking like a mirror reflecting back your financial personality. It is hard to fake and is likely the lightning rod for shaping one’s own particularly unique approach to investing. Whoops! Perhaps that mirror is reflecting a confused investor; it may be time to slow down and set aside some time to reflect on what the money is for.
Set specific objectives. Determine exactly what funds are being accumulated for. Are they to be used for cash needs, income flows, or additional capital when the investment matures? Are the funds for specific future events? Each could have a different investment time frame and a different overall strategy. For example, do you want to fund an annual vacation with income, or are funds to be added to the principal balance or used for acquiring an asset such as a child’s education or to buy a yacht? The choices often dictate the investment approaches in most detail. The overall allocation approach will be far different for the aggressive investor who only wants investment growth to the risk-averse investor who only seeks income with no concern at all about principal maintenance. Mimic the family situation as closely as possible in financial plan development. Make it personal!
Choosing the Right Investment Options
What are the different accounts to look for? Now that you know your employment status and risk tolerance, it’s time to get even more specific. Let’s talk, or rather, think about taxes. There are two types of investment accounts: retirement and nonretirement accounts. Retirement accounts allow you to invest your money and defer paying taxes on it, while nonretirement accounts do not. The short-term savings goal you identified (buying a new car, finally finishing your degree, etc.) will be further discussed in your financial goal-planning kit and not gone into any further here until you have defined it more specifically. Once you do that, you may need to come back and adjust your investment choices if your goal has a specific time frame of fewer than five years. Most of the examples given are based on the money you make with your job, but if you are a student in school, use other funds such as money from allowances and part-time jobs that you can set aside; they work for the purposes of these examples, and the concepts still apply.
What are the different types of accounts? The accounts you need to be concerned with are: 1) Retirement accounts: a) Traditional 401(k) or 403(b) retirement plans; b) Roth IRA accounts; c) Traditional IRA accounts; d) SEP accounts. 2) Nonretirement accounts: a) Brokerage accounts; b) Simple savings accounts.
Stocks
Stocks are offered by companies, big or small, that have ownership divided into shares. While the number of shares is constantly changing, the company is a legal entity and its total share capital remains constant. Shareholders receive a portion of company profits and have voting rights at shareholder meetings. The company’s annual report and financial statements will give you a general overview of these rights and are a good starting point for your company research. Once you own the stock, that makes you a part-owner of the company. The stock value changes daily based upon a wide range of variables. A company whose stock you hold can undergo a bad time and the value of your stock will decrease. Conversely, the company can do extremely well and the value of their stock can go up dramatically. The stock market offers a way to buy and sell stocks on a regulated market. Shares of publicly traded companies are popularly traded. It is wise to consult your stockbroker or stock trading company before choosing your first stock if you are new to investing. There are companies whose main business is to help you choose stocks after your assessment of their advice. These amounts of research are beyond the scope of this article and its novice investor to explain. However, stock analysts assess the health of a company and make informed recommendations based upon financial data, informing the stockbrokers who deal with the actual transactions.
Some stocks pay a dividend that usually works out to be 1-3% annually of the share price. The investor is better off reinvesting these dividends through the purchase of additional shares. This is known as a dividend reinvestment plan (DRIP). If the value of the stock increases considerably from year to year, then money will be made with its sale. If the stock you own pays you $100 a year, and you have bought the shares at $300, that $100 or approximately 3% a year that the stock pays will certainly help when older ties of fixed income may set in. Also, if you buy stock for $20, and 5 years later the stock rises in value to $70, when you sell, you will make $50 for every share of the company you hold. This is a return of 250% and makes investing in stocks a very attractive proposition as against the normal deposit at the bank which will yield you 3% if you are lucky. It is always good to compare various facts available to you before investing in stocks such as company history, reputation, business model, relations with employees, stability within Jewish, Christian, or other religious backgrounds, business ethics, profitability, cash flow, yearly return on equity, earnings growth rates, relative price-earning ratio. Summarizing, investing in stocks is a good way to improve your family’s financial health, establish self-employment, and leave future generations better positioned in life.
Bonds
You may have heard that bonds are a lesser form of investing than stocks. Take no stock in this little bit of stockbroker propaganda. Wielding some bonds, young investors, who can handle a high stock component, actually take the greater risk. Most investors are accustomed to thinking of both stocks and bonds as investments. In their legal setup and the way they react to changes in the market, bonds and stocks are totally unlike. Investors should! Many investors maintain a bond or other fixed income portion in their portfolios to hedge against stock market weakness. This book is about the best way for growing wealth. From an investor’s point of view, a bond is much more like a savings account at a bank.
A savings account might pay 1% interest, and you are promised not to lose any of the money that you have in it. A government bond might pay 3% interest, but only if you keep the money invested for its full term. A corporate bond might pay 6%, but only if the financial resources of the corporation are less shaky than a careful investigation might reveal. Then 3 years later, 3% more would be added to the year 2 principal. Once you buy the bond, a corporation or government must pay you a certain interest “coupon” income once every 3 months. After 10 years, the $100 founding principal is returned to you. Because a government bond pays a paltry 3% a year, that is where one puts fixed income holdings (for those who choose to hold one) in those years when the stock market is zipping ahead. When one is growing a serious nest egg, the best course is to learn to ignore the bond portion.
Mutual Funds
A diversified mutual fund, which invests in stocks, has less risk than the purchase of a single stock. The mutual fund company makes these determinations for you. They have professional managers who have conducted industry examinations and made judgments based on the study of the investor’s goals. This offers diversification, which means that investors do not have to invest thousands of dollars to enjoy the benefits of reduced risk. Mutual funds also offer liquidity. When a manager is responsible for purchasing these things, mutual funds sell all funds. All funds have expenses, and they can be a cost-effective way to access investment values. However, expenses vary, so be diligent when choosing among options. Be aware of expenses to invest effectively. Look for funds that have a proven track record of long management and provide lower expenses than average.
So, we have gone through many of the basic characteristics of investing in stocks and mutual funds. In the securities, you make mutual fund purchases and sales. There are buying and selling activities at the end of the day based on the closing prices issued above. They have to be bought. There are many characteristics that link mutual fund investing together. With diversified investment in stocks already held in a portfolio, they offer immediate diversification for even a small amount of money. Mutual funds pool money from many investors to buy a basket of stocks, bonds, or both. Then you get interest or dividends, or both, as returns from the purchase of bonds or stock issuing trades. Mutual funds offer services to investors and save you a lot of time. They offer you professional management of your money. With the purchase of mutual funds by individuals, it helps in obtaining greater trading efficiency.
ETFs
Exchange traded funds or ETFs are a relatively simple and cost-effective way to gain access to a wide variety of assets from a single investment. They are investment funds (very much like managed funds and can contain a variety of investment types including shares, fixed interest, property or a combination) that trade on a stock market and can be bought or sold just like listed shares. ETFs are considered easy to trade and will not usually have the level of entry and exit costs that can be experienced with some other types of managed investments. ETFs can give you exposure to a wide range of investment types, assets and sectors covering all asset classes and sub-classes and many countries around the world, including emerging countries markets. They can also provide an efficient way to invest into a number of shares or across a particular index like the top senior companies on the ASX generally known as the S&P/ASX 50 or the ASX200.
Monitoring and Adjusting Your Investments
After you figure out your target asset allocation and actually get your investments established, it may feel that you’re already done. That could be true in a perfect world, but in the real world, you will from time to time need to monitor your investments and make some adjustments. This should happen every 6 months, 12 months, 18 months, or even 24 months depending on how you’ve set up your investment mix. At a minimum, rebalancing once a year is a good goal to shoot for.
Key areas frequently overlooked in other investment guides include a process to help you gain a better understanding of investing, a pointer to beneficial company investment information (such as what to look out for in Annual Reports, what analysts’ comments generally mean, etc.), and information on what to expect when you do actually open and start using an investment account. Even though this may have been your overall interest, do not be daunted by the idea of the length of this guide. Each main section is readable as a standalone practical summary of these important topic areas; and they have been structured to encourage you to take each step of your investment learning at your own pace.
But first, what is investing? At its core, investing is the practice of spreading resources around in ways that attempt to best prepare for a financial future that is largely unpredictable. In the investing world, the more diverse your resources, the more likely you are well-prepared for life’s unpredictabilities. Diversification allows us to survive the losses that come our way. Investing takes effort and appropriate consideration beforehand. You need to be knowledgeable of the nature of investing and you need to gain a good understanding of the opportunities open to you, such as the different investment account options and the different types of investments to choose from. You need to decide what to invest in and understand who you may be pitting yourself against, i.e. who is bidding against you to stock shares in a company. Make sure you get the right company investment information and use it! Without this research, you will become more dependent on external investor sources.
What is Investing?
The general synonym for fear is usually the word “investing,” perhaps because it is one of those financial wonders that Americans either struggle to understand or are terrified to think about. Yet, investing is the one component of personal finance with the power to restore our financial options. Through investing, a small effort and a little money can magnify to become a giant debt-paying, retirement financing force, with the potential to make most financial dreams come true. But before these big planners can actualize this potential for the future, those in debt need to accomplish the most basic lesson there is about investing: get into it and stay there.
Investing is the process of making your money work for you rather than you working for your money. It is the act of devoting time, effort, or money to achieve a desired result, and failure is not achieving that result. The desired result is growth over time in assets, such as purchasing power, provided by a sure and consistent rate of return. Another way to look at it is being able to make money when you sleep, sit poolside in Maui, or your kid’s Little League game. Any investment should accomplish this desire, as when an investment is made, money is usually exchanged for something else. It could be a stock, a bond, a mutual fund, or any sort of asset that is expected to deliver future returns. These returns could take the form of interest, dividends, or capital gains. Interest, as made when a deposit account is opened at a bank, is the rental paid for borrowing money.
Benefits of Investing
There are several reasons for a person to consider investing rather than merely putting their money in a traditional savings account or into a government bond paying 3% to 5% interest. In contrast, several opportunities are available to the investor in the investment world that will generate returns in excess of 5%. Indeed, if one is savvy enough and is willing to take on additional risks, then he/she could potentially see their investment return several times in a year. However, the benefits of investing are not only confined to the pursuit of high returns. They also include:
Inflation Protection: Inflation is defined as the general increase in prices, and it erodes the purchasing power of a currency. As one knows, their grandparents could buy a whole meal for a few cents but that isn’t the case today. The same amount of money could not buy the same meal. Therefore, people’s money would be worth less if inflation is rampant. Right now, the bank is offering all of their clients a loan at 6%, just so this couple could keep in lockstep with the cost of living, since it is virtually impossible to do so nowadays. Yet, if people’s deposited funds remain subject to inflation, then the bank’s 6% interest rate becomes meaningless since the couple’s purchasing power would remain constant.
Understanding Risk in Investing
Risk is generally bad when it comes to investing. Nobody wants to suffer losses. However, all investments come with risk. Understanding the risk associated with an investment can help you make a more informed decision. For example, simply understanding that real estate is generally more expensive and time-consuming to sell automatically makes it a less popular trading choice. Stocks are generally more volatile than bonds. Short-term United States Treasury security returns tend to be less risky than long-term, but the return is generally less. But no matter which investment you choose, the idea is to identify the state between risk and return and use that information to make an educated decision. Not too risky, not too low rewards.
To drive this point home on risk, it’s important to understand what is often touted as a rule of investing. Never invest money that you cannot afford to lose. This is a rule that has been hammered into the heads of investors the world over. But isn’t risk meant to be avoided? How would anyone knowingly want to lose the money they have put away? The key to this rule is not fear but a reflection of the goals of investing. If a person is investing with defined returns in less than three years, then that person should probably not be investing in a stock. If an investor needs access to their money quickly, an emergency fund is going to offer relatively fast access to those funds without fear of losing potential earnings on long-term commitments. The money you are investing is money that you will not need for long-term reserves.
Types of Investment Risk
Investing involves taking risks. The principle is, the greater the potential return, the greater the risk involved. However, the size of the risk is not the same for all risk factors involved in investment. In fact, the magnitude of the risk is not even the same. In general, the three main types of risk involved in investing are as follows:
Market Risk: This is the risk that the value of an investment will decrease due to a change in the value of the market. Thus, it is similar to General Economic Risk. Market Risk affects the value of a security in relatively the same direction as the market as a whole. Market risk can be reduced through, for example, good diversification among different asset classes.
Business Risk: It is the possibility that the firm issuing the security will enter bankruptcy. It is determined by the capability of the business: if the assets owned by the business are relatively stable and able to generate a reliable income stream over time, the company is a low business risk investment.
Inflation Risk: It is the possibility that the returns on the investment will not keep up with the inflation of the economy. It is accurate to say that the risk comes from the decreasing purchasing power of a typical cash flow that the investment provided.
These are the principal types of risk when investing in stocks. However, other types of risk should also be taken into consideration, as they are universally applicable. The most common of these is the Political risk and the Risk due to mentioning among others.
Strategies to Overcome Fear of Losing Money
Paper doesn’t seem scary now compared to the possibility of losing our money, does it? That’s right, fear of losing money is a very real issue surrounding investing, and no less than 47% of Americans struggle with it, according to the North American Securities Administrators Association. It is also one of the biggest deterrents when beginning to invest in the stock market. The positive news? It’s normal to experience this fear, and there are strategies to overcome it.
Here are some strategies to help overcome the fear of losing money when investing:
1. Prepare yourself for a long-term mindset: One of the simplest ways to accept the possibility of losing money when investing is by understanding that it is a long-term game. Accepting volatility and the possibility of losing money will make the stock market a less frightening financial prospect.
2. Establish financial goals to work towards: An emergent reason to be afraid of losing money is when one has never established financial goals with their money. Without a sense of clear financial direction, our minds will start to assume the worst-case scenario, also life scenarios where money is missing.
3. Research and educate yourself on strategies to stem losses: Sometimes the scariest looking figure is the one you do not understand. Knowledge is the light that will expose these ghostly figures lurking in the dark. Hedging a portfolio is a way to protect oneself from the possibility of losing money.
Educate Yourself
The S&P (Standard and Poor’s) 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most widely followed equity indices and is considered to be one of the best representations of the U.S. stock market. Other indexes include the Dow Jones Industrial Average, the NASDAQ, the Russell 2000, and the Wilshire 5000 among others.
There are a number of different investments. Stocks, bonds, index funds, and mutual funds each offer unique benefits and risks. It is important to know that all investing is risky. The potential for gains and the potential for losses is the balancing act that all investors face. There are no guarantees that you will receive a return, an investment may lose value, and there are investment fees. However, it is important to recognize that there are also no guarantees for putting money in a savings account either. Only four percent of financial experts believe that putting money into a savings or money market account will outperform investments in the stock market over time.
It is important that you explore your available options and make the decision that is the best for you. Consider diversifying your portfolio by investing in different types of assets. This will help to manage your risk. Remember, you are taking steps to prepare for a successful financial future.
Goals: What are your financial goals? Are you planning for your retirement or considering investing for a shorter term goal, like purchasing your first home? Be specific with your goals and the length of time over which you would like to invest. Knowing your time horizon is very important as this will help you to determine the types of investments that make sense for you, your risk tolerance, and subsequently the amount that you contribute to your investment accounts.
Start Small
As much as I am a fan of index investing, which usually requires larger sums of money to get started, I am a bigger fan of starting smart and the smartest thing to do is to actually get started. So if you have a small sum of money that you are comfortable parting with, there are a few options for you in Malaysia. Fundsupermart has a fund named Money Market that requires you to invest only RM 1000 for the initial purchase and the minimum additional investment is RM 100. The fund manager for this fund is Pacific Mutual (an established well-known unit trust institution in Malaysia). Additionally, it is an index fund which means that there are no active management fees (AMF) and no switching fees. In comparison, the other (non-index, actively managed) Pacific Mutual Money Market trust also requires only RM 1000 as initial investment but you have to spend RM 500 for additional investments. This also means that if you want to invest a sum of money that is less than this amount, you won’t be able to do so.
If you are interested in investing in gold, Public Bank has a fund named PB Europe Gold Fund which currently requires you to spend RM 600 only for the initial purchase. Alternatively, Kenanga Investors Berhad has a fund named Kenanga Gold Fund which requires RM 1000 for the initial purchase. Do note that the reason for having to even invest 1 level higher is because these two funds (like most funds) charge a fee known as the sales charge. The funds that I will be mentioning henceforth are those that have no sales charge, are index funds, and allow the smallest investments. I’m guessing if you’re reading this page, you’re earning an allowance and you’d likely not want to part with an additional 6% of your money before your investment even has a 50% chance of breaking even. So basically, sales charge-free funds that have low investment fund sum requirements are definitely the most logical option for a beginner.
Diversify Your Portfolio
In contrast with investing in a single stock, diversification is a risk-management strategy that boils down to the old adage of not putting all your eggs in one basket. Simply put, diversification is the most important factor in reaching long-range financial goals while minimizing the probability of losing money. Since investment return is related to risk, lowering the risk associated with an investment delivers a return more in line with the risk assumed. The increased level of portfolio diversification can lead to a reduction of risk relative to the risk in a single asset. By introducing into the portfolio a collection of assets with dissimilar risk or return attributes, problems within one asset can be offset by the performance of another asset.
Further, risk reduction is optimum at about fifteen stocks in the portfolio and there is a negligible impact on portfolio risk beyond a fifteen-stock portfolio. Therefore, a diversified portfolio can offer superior risk reduction benefits. But what is perhaps less well understood is the powerful effect that diversification has in reducing investment risk amount portfolio assets. After all, investment gain is directly proportional to the willingness of the investor to assume investment risk. The reverse is also true. The higher the risks, the greater the losses. Diversification is the single most powerful choking tool managers can use to ensure they don’t have all their eggs in one basket.
Set Clear Goals and Timeframes
Putting down investment goals and timeframes in writing is a powerful exercise, and the list of your financial needs, wants, and wishes should be detailed to the greatest extent possible. You can then place your needs, wants, and wishes in order of priority. This creates an absolutely fascinating exercise that can only lead to good things. The process is both practical and necessary. When one sits down to draft these goals and objectives, it often ends up looking like a mirror reflecting back your financial personality. It is hard to fake and is likely the lightning rod for shaping one’s own particularly unique approach to investing. Whoops! Perhaps that mirror is reflecting a confused investor; it may be time to slow down and set aside some time to reflect on what the money is for.
Set specific objectives. Determine exactly what funds are being accumulated for. Are they to be used for cash needs, income flows, or additional capital when the investment matures? Are the funds for specific future events? Each could have a different investment time frame and a different overall strategy. For example, do you want to fund an annual vacation with income, or are funds to be added to the principal balance or used for acquiring an asset such as a child’s education or to buy a yacht? The choices often dictate the investment approaches in most detail. The overall allocation approach will be far different for the aggressive investor who only wants investment growth to the risk-averse investor who only seeks income with no concern at all about principal maintenance. Mimic the family situation as closely as possible in financial plan development. Make it personal!
Choosing the Right Investment Options
What are the different accounts to look for? Now that you know your employment status and risk tolerance, it’s time to get even more specific. Let’s talk, or rather, think about taxes. There are two types of investment accounts: retirement and nonretirement accounts. Retirement accounts allow you to invest your money and defer paying taxes on it, while nonretirement accounts do not. The short-term savings goal you identified (buying a new car, finally finishing your degree, etc.) will be further discussed in your financial goal-planning kit and not gone into any further here until you have defined it more specifically. Once you do that, you may need to come back and adjust your investment choices if your goal has a specific time frame of fewer than five years. Most of the examples given are based on the money you make with your job, but if you are a student in school, use other funds such as money from allowances and part-time jobs that you can set aside; they work for the purposes of these examples, and the concepts still apply.
What are the different types of accounts? The accounts you need to be concerned with are: 1) Retirement accounts: a) Traditional 401(k) or 403(b) retirement plans; b) Roth IRA accounts; c) Traditional IRA accounts; d) SEP accounts. 2) Nonretirement accounts: a) Brokerage accounts; b) Simple savings accounts.
Stocks
Stocks are offered by companies, big or small, that have ownership divided into shares. While the number of shares is constantly changing, the company is a legal entity and its total share capital remains constant. Shareholders receive a portion of company profits and have voting rights at shareholder meetings. The company’s annual report and financial statements will give you a general overview of these rights and are a good starting point for your company research. Once you own the stock, that makes you a part-owner of the company. The stock value changes daily based upon a wide range of variables. A company whose stock you hold can undergo a bad time and the value of your stock will decrease. Conversely, the company can do extremely well and the value of their stock can go up dramatically. The stock market offers a way to buy and sell stocks on a regulated market. Shares of publicly traded companies are popularly traded. It is wise to consult your stockbroker or stock trading company before choosing your first stock if you are new to investing. There are companies whose main business is to help you choose stocks after your assessment of their advice. These amounts of research are beyond the scope of this article and its novice investor to explain. However, stock analysts assess the health of a company and make informed recommendations based upon financial data, informing the stockbrokers who deal with the actual transactions.
Some stocks pay a dividend that usually works out to be 1-3% annually of the share price. The investor is better off reinvesting these dividends through the purchase of additional shares. This is known as a dividend reinvestment plan (DRIP). If the value of the stock increases considerably from year to year, then money will be made with its sale. If the stock you own pays you $100 a year, and you have bought the shares at $300, that $100 or approximately 3% a year that the stock pays will certainly help when older ties of fixed income may set in. Also, if you buy stock for $20, and 5 years later the stock rises in value to $70, when you sell, you will make $50 for every share of the company you hold. This is a return of 250% and makes investing in stocks a very attractive proposition as against the normal deposit at the bank which will yield you 3% if you are lucky. It is always good to compare various facts available to you before investing in stocks such as company history, reputation, business model, relations with employees, stability within Jewish, Christian, or other religious backgrounds, business ethics, profitability, cash flow, yearly return on equity, earnings growth rates, relative price-earning ratio. Summarizing, investing in stocks is a good way to improve your family’s financial health, establish self-employment, and leave future generations better positioned in life.
Bonds
You may have heard that bonds are a lesser form of investing than stocks. Take no stock in this little bit of stockbroker propaganda. Wielding some bonds, young investors, who can handle a high stock component, actually take the greater risk. Most investors are accustomed to thinking of both stocks and bonds as investments. In their legal setup and the way they react to changes in the market, bonds and stocks are totally unlike. Investors should! Many investors maintain a bond or other fixed income portion in their portfolios to hedge against stock market weakness. This book is about the best way for growing wealth. From an investor’s point of view, a bond is much more like a savings account at a bank.
A savings account might pay 1% interest, and you are promised not to lose any of the money that you have in it. A government bond might pay 3% interest, but only if you keep the money invested for its full term. A corporate bond might pay 6%, but only if the financial resources of the corporation are less shaky than a careful investigation might reveal. Then 3 years later, 3% more would be added to the year 2 principal. Once you buy the bond, a corporation or government must pay you a certain interest “coupon” income once every 3 months. After 10 years, the $100 founding principal is returned to you. Because a government bond pays a paltry 3% a year, that is where one puts fixed income holdings (for those who choose to hold one) in those years when the stock market is zipping ahead. When one is growing a serious nest egg, the best course is to learn to ignore the bond portion.
Mutual Funds
A diversified mutual fund, which invests in stocks, has less risk than the purchase of a single stock. The mutual fund company makes these determinations for you. They have professional managers who have conducted industry examinations and made judgments based on the study of the investor’s goals. This offers diversification, which means that investors do not have to invest thousands of dollars to enjoy the benefits of reduced risk. Mutual funds also offer liquidity. When a manager is responsible for purchasing these things, mutual funds sell all funds. All funds have expenses, and they can be a cost-effective way to access investment values. However, expenses vary, so be diligent when choosing among options. Be aware of expenses to invest effectively. Look for funds that have a proven track record of long management and provide lower expenses than average.
So, we have gone through many of the basic characteristics of investing in stocks and mutual funds. In the securities, you make mutual fund purchases and sales. There are buying and selling activities at the end of the day based on the closing prices issued above. They have to be bought. There are many characteristics that link mutual fund investing together. With diversified investment in stocks already held in a portfolio, they offer immediate diversification for even a small amount of money. Mutual funds pool money from many investors to buy a basket of stocks, bonds, or both. Then you get interest or dividends, or both, as returns from the purchase of bonds or stock issuing trades. Mutual funds offer services to investors and save you a lot of time. They offer you professional management of your money. With the purchase of mutual funds by individuals, it helps in obtaining greater trading efficiency.
ETFs
Exchange traded funds or ETFs are a relatively simple and cost-effective way to gain access to a wide variety of assets from a single investment. They are investment funds (very much like managed funds and can contain a variety of investment types including shares, fixed interest, property or a combination) that trade on a stock market and can be bought or sold just like listed shares. ETFs are considered easy to trade and will not usually have the level of entry and exit costs that can be experienced with some other types of managed investments. ETFs can give you exposure to a wide range of investment types, assets and sectors covering all asset classes and sub-classes and many countries around the world, including emerging countries markets. They can also provide an efficient way to invest into a number of shares or across a particular index like the top senior companies on the ASX generally known as the S&P/ASX 50 or the ASX200.
Monitoring and Adjusting Your Investments
After you figure out your target asset allocation and actually get your investments established, it may feel that you’re already done. That could be true in a perfect world, but in the real world, you will from time to time need to monitor your investments and make some adjustments. This should happen every 6 months, 12 months, 18 months, or even 24 months depending on how you’ve set up your investment mix. At a minimum, rebalancing once a year is a good goal to shoot for.
The reason we need to monitor our investments is that the actual composition of your investment mix will and does change over the long run. For example, if your target allocation for stocks is 50 percent and for bonds is 50 percent, in a year where stocks perform better than bonds, increasing to 60 percent of the mix. In such a case, you will need to adjust the final percentage of investments in order to bring the actual portfolio back to a 50-50 as per target. This can be done by selling off some of the stock investment and buying an amount equal to the sale in bond investment. After the rebalancing, your investment balance would be back at 50-50.
The reason we need to monitor our investments is that the actual composition of your investment mix will and does change over the long run. For example, if your target allocation for stocks is 50 percent and for bonds is 50 percent, in a year where stocks perform better than bonds, increasing to 60 percent of the mix. In such a case, you will need to adjust the final percentage of investments in order to bring the actual portfolio back to a 50-50 as per target. This can be done by selling off some of the stock investment and buying an amount equal to the sale in bond investment. After the rebalancing, your investment balance would be back at 50-50.