Learning how to invest is one of the most important lessons you can learn in life. With a basic business understanding and the ability to make and stick to a plan, you will be on your way to a good start. Do not confuse saving with investing. Investing is the act of putting your money into an asset or business to generate profit. Most people struggle with investing because of a lack of financial literacy. Arming yourself with the right knowledge can help you go a long way.
Some of the more popular investment instruments are stocks, bonds, structured deposits, unit trusts, insurance, endowments, etc.
Stock - A share in the ownership of a company
Bond - A debt investment for money lent to another party
Unit Trusts - Investment programmes managed by professionals that pool money from investors to invest in shares, debt funds and government securities, with the intention of making capital gains.
Different people have different financial goals. Some want to grow their retirement nest egg, others want to be able to comfortably finance their children’s education; some prefer to use high leverage and speculation to “get rich quick” while others prefer a slow and steady approach. Let us discuss four basic investment strategies that you might want to consider for your own investments.
In passive investing, you invest in an exchange traded fund (ETF) or unit trust that tracks an index, which follow the characteristics of a certain market (e.g. STI), giving you exposure to a diversified range of securities. One major advantage is cost efficiency; furthermore, a professional fund manager will be there to help you make the investment decisions.
Some consider this a passive investing technique. If you buy a fixed dollar amount worth of a particular security on a regular basis, regardless of the price of the security at the time you bought it, you are practicing dollar cost averaging. More shares will be bought when the prices are low and less when the prices are high. With time, average cost of owning the security will keep reducing. The major advantage of dollar cost averaging is you do not have to suffer the risk of investing a large sum if that investment happens at the wrong time. You need not worry about timing your entry into the market, and risk buying high and selling low.
True to its name, this strategy is premised upon identifying and purchasing an undervalued asset at a reasonable price and holding on to it. This is based on the assumption that in the long run, financial markets give a decent rate of return, even after you take volatility into account. Even if there is a decline in the market, you must not make irrational or impulsive decisions. Doing so might result in you losing out on potential returns. Buy and hold depends on fundamental analysis and most investors who follow this strategy do not have a balanced portfolio. Inversely, intra-day trading depends on technical analysis to predict price movement.
Timing the market is probably the most difficult investing strategy in this list, because it is based on opportunism, probabilities and assumptions. Investors try to buy securities when prices have reduced, with the intention of selling them when prices are higher. It is not a very sustainable strategy because you will need to invest frequently and pay high transaction fees, so net returns may not always be positive.
Now that you have these four strategies, you can learn how to combine them and use them optimally. Remember that you do not have to be an investment expert to make money. If you follow the steps below with a passive core portfolio base, you will be able to invest successfully with calculated risks. You can also speak with our Relationship Managers to learn more about successful and timely investing.
Make it a point to save 10% and invest another 10-20% of your gross monthly salary.
Use passive investing to create a core for your portfolio - an ETF or unit trust fund that has broad diversification. For example, break down your investment like below:
|Global Equities Fund||30%|
|Global Bond Fund||40%|
|Global Properties Fund||20%|
In the case of a severe market or sector downturn, you may consider diverting additional funds into the affected asset classes and securities. This allows you to purchase these securities at relatively lower prices to potentially capitalize on any uptrend that might present itself should the economy recover. However, this strategy requires careful consideration of the associated risk before adoption.