ABCs of Investing - Final Lessons
Start Early & Get Some Help
It's never too early to start - when you start investing early you exploit the power of compounding. For example, if you started at 20 years with $10,000. Assume 5% a year compounded. By the time you're 62, than 20 to 62 the sum would have gone to $80,000. If you had started investing at 40 years, $10,000 you would get $30,000 plus. The difference is enormous.
There's another advantage in starting early. If you start early you have a longer time horizon, you are able to take on more risk, accept more volatility, able therefore to invest in higher risk, higher return assets.
Beware of Risks
Risk is about loss, loss of principal & at extreme, losing your money totally. The first thing is to decide - what kind of investment objective & risk appetite he has. DonÂÃ’â¬aÃ'Â¡Ã’â¬aÃ'Â¯t just say I want to buy something today or what's hot or what's the flavour of the month. Investors must not look at the upside when they make an investment decision. He has also to look at the investment risk of the product.
At the same time, one shouldn't avoid risk altogether. Because if you do, if you don't want to take risk, then you're not going to have returns.
Time is VERY important. The amount of time that you have to meet your investment objective is a major determinant of how much risk you can take & therefore how much of your portfolio you can put into risky but higher return assets.
Do Your Homework
What is your investment philosophy? What is your investment process? What is your track record?
Build Up Your Portfolio
Asset allocation is probably the single most important decision you have to make. Research has shown that 90% of returns generally come from asset allocation.
The asset allocation question - the big picture, the map of your investment plan. Having settled on that map, you then can go down to tactical questions, what stocks to buy, what fund manager to select, down the line.
Diversify, Diversify, Diversify
Diversification is the key to managing your risk. You should have a basket of investments where some will do well & some will not do so well. All in all, you do pretty alright. Even though you have to suffer a loss, the loss will not be large.
Diversification can take a number of different forms. You can diversify through asset classes, so you have a mix of equities, bonds, property & cash. And you can diversify within asset classes.
Asset classes tend to move & react differently to economic environment. For example, in a recession, stock markets might do poorly, or even property market. But bonds do well. So if you have a portfolio that's well spread out across equities property & bonds, you are protected.
Watch Your Costs Like A Hawk
Costs are very important, particularly when returns are modest.
Get a statement from your financial advisor as to what are the charges levied on the investor. There are various costs & fees. A one time charge, called the front-end fee, can be up to 5%. The annual management fee can vary between 1 to 2.5% a year. There are also switching costs which can be up to 1%.
The prospectus will explain management charges & the other major charges such as trustee fee & audit cost. The annual & semi-annual report will show the total cost every 6 months.
Stick With Your Long Term Game Plan
Speculation or short-term investing has never been a profitable one because there is a lot of empirical evidence to suggest that short-term trading is a loser's game. 8 out of 10 investors, if not more, will end up losing money trying to guess the direction of the market or individual share price. Successful investors in this world are long term investors who will ignore market gyrations & look for long term trend & value.
If you can, remove the emotion & sentiment from investing. One way is to have a regular savings plan so it doesn't matter if markets rise or fall, as you're going to be putting in regular amounts of money.
History shows that most investors are really unable to time the market, to know when to get out & when to get in. And the most successful proven strategy is to stay regularly invested over a period of time.
Keep An Eye On Changes Around You
Investors have to give time & make effort to learn about investing & keep track of their investment portfolio.
It's important that every investor spends sometime to review their asset allocation decisions every year. You need to consider whether you family circumstances have changed. For instance, if you just got married, your asset allocation should change to reflect this.
In a typical top-down approach, you shape your investment first by forecasting the economy & then choosing the sector & a company. Changes in the economic conditions are very important. Shifting the proportion of your investments say from equities to bonds or into more cash so your portfolio can withstand a recession.
Stand Clear Of The Herd
The 2 most powerful emotions are greed & fear. When markets are going up, a lot of people tend to want to jump in to try & not miss out. On the other hand, when markets fall, everyone becomes fearful that they may lose even more.
Successful investors try to fight this herd instinct. They try to think independently & act independently. Among the most successful investors this century are independent thinkers.
The buy low, sell high principle which is probably the most important investment rule. In order to buy low, sell high, investors should buy in times of crisis or despair & then sell in times of exuberance.
Never Forget That There's No Free Lunch
Investors must be realistic in their expected returns of their investments. If for instance they're invested in a product that offers little risk, they cannot look forward to high returns. There's no such thing as a low-risk product with high returns.
Use common sense. Investment professionals often use common sense to make judgments.
If you don't understand the investments you're making, parting with your hard-earned money, take the wise route of getting help.