Investment is not only for the rich or those who yearn for a luxurious lifestyle. In fact, anyone who wants to beat inflation should consider investing. The interest rates on most bank savings account are currently at 0.05% per annum. This means that cash kept in a bank savings account earns interest at rates that do not even keep pace with inflation and is depreciating in value every day. Depending on your risk appetite, you can make use of a suitable investment portfolio to help counter inflation. Your financial consultant would be able to help assess your risk profile.
With the right mind set and good knowledge, we not only can use investment to beat inflation, we can also use it to achieve our financial goals and prepare us for our desired retirement lifestyle.
Common mistakes many people make when considering about investing:
Paralysis by Analysis
It is wise to consider carefully before investing. Yet, we should avoid paralysis by analysis. Opportunity cost is involved when we over-analyze and end up not taking action.
Start late
Once we decide to invest, we should not procrastinate. We all know the power of compounding. The sooner you start, the more likely you are going to achieve your financial goals.
Invest before clearing credit card debt
Unlike mortgage loans, the interest charged for credit card debt is extremely high, typically 24% per annum. Hence, it makes a lot of sense to pay off the debt first before investing.
Put all eggs into one basket
Even if you are a daredevil, you should not put all your money into one single investment as it could end up going down the drain.
Follow the crowd
Not every type of investment is for everyone. As Warren Buffet has said, ‘Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.’ Hence, be realistic, know your risk appetite and invest accordingly.
Confuse investment with speculation
There is a very thin and blurred line between investing and speculating. Investment is done through informed decisions, whereas speculation is as good as gambling. For long term and profitable survival in the markets, we must try to control the urge to speculate.
So what are some useful investment tools worth considering?
Unit Trust
A unit trust is a fund which adopts a trust structure, and pools money from various investors, investing in a portfolio of assets according to the fund’s stated investment objective and investment approach. While unit trusts offer potentially higher returns, there are certain levels of risk involved – mainly systematic risks. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular stock or industry.
Endowment Plan
An Endowment Plan is generally safer, and typically comes with a guaranteed component. However the returns are lower as compared to returns from unit trust funds. Endowment plans requires long term commitment and is considered as a form of disciplined savings. Various insurers offer endowment plans with different features to suit market needs.
Balancing It All
A well-balanced and well-diversified portfolio should consist of a good mix of unit trust investments and endowment plans. This can be illustrated clearly using a simple analogy of a sailboat. A sailboat comprises of two main parts – sail and hull. The sail represents unit trust investments; the hull represents endowment plans. Having a big sail helps the boat to sail towards its financial destination in the shortest possible time. However, having an oversized sail in proportion to the hull creates instability, and the boat has a higher probability of capsizing in the event of a financial storm.
The hull provides the stability to the boat. Again, having an oversized hull in proportion to the sail also creates a problem. Although the sailboat is stable and the journey comfortable, the sailboat takes a much longer time to reach its destination. Therefore, in the process of building a larger sailboat for yourself, you as the captain need to constantly remember to keep the sail and hull in the correct proportion, so as to enjoy a fast yet stable ride towards your financial destination!
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.