The Basics Of Investing
Investing is increasingly become more common in affluent societies such as Singapore. And people seemingly do it for various reasons – so that they can retire early, or support their family, generate another source of income etc.
Indeed, it has been said that investing is one of the best ways to grow your money, especially if you dislike doing sales or don’t want to risk your savings to start a business. So if you are new to investing, how should you start?
Here’s our take:
Set Targets For Yourself First And Ask Yourself A Couple Of Important Questions
Before investing, the first important question to ask yourself is, “What are my goals for investing?”. For example, are you investing to finance your children’s education or are you simply investing to generate another source of income to fund your retirement?
Not only that, you also have to consider the following questions:
- How much I can save every month?
- How much risk can I tolerate? (in other words, am I able to tolerate huge fluctuations in the price of my investments?)
- How long am I willing to hold a particular investment?
- How much time I am willing to spend monitoring my investments?
The reasons for asking these questions is that it will determine what’s your best investment strategy and what investment instruments (i.e. stocks, bonds, real estate etc.) you would use to achieve your investment goals.
Long-term Investment Versus Short-Term Investment Strategy
A common question when it comes to investing is, “Should I consider long-term investment strategy or a short-term investment strategy?”
Though the definition of long-term is pretty subjective, generally, if you tend to hold your investments for about 6 months or longer, you would likely adopt a longer-term investment strategy.
So how should you choose between a longer-term and a shorter-term investment strategy?
One important consideration that you should ask yourself is the amount of time that you are willing to commit to monitoring your investments. And this is related to the lifestyle you are currently leading.
For example, if you are a busy working executive who is only able to commit a few hours a week to monitor your investments, then you might consider a using a longer-term investment strategy which generally speaking, requires you to monitor your investments less often.
For most affluent societies, a wide array of investment instruments are available, from the more traditional ones like stocks, bonds & property to leverage instruments such as Contract For Differences (CFDs) and Forex.
In deciding what instruments to use, you may want to take into account the risk & return characteristics of the investment instruments you are using and whether it fits into your investment objectives.
For example, historically in the long term, the returns of stocks tend to outperform that of bonds. However, in the short term, the price of stocks tend to fluctuate more than that of bonds. So what does this mean?
If your investment goals are more short-term (for example, you are saving to buy a house in 1 year’s time) and you need to cash out your investments soon, you would likely consider investing in ‘safer’ investments such as bonds, whose price tends to fluctuate less than of stocks. The reason being that if you would not want the value of your investments to be jeopardised by short-term price fluctuations.
Similarly, if you are investing for a longer term (for example, you are investing to fund your retirement in 20 years time) and you need not cash out your investments in the near future, you may want to consider investing instruments with higher returns such as stocks.
That being said, before you attempt to invest in any type of investment instruments, it would be a wise idea for you to learn what you can about that type of investment. The cost of educating yourself beforehand usually is far less than learning the ‘hard way’ (i.e learning by trial and error through investing in the market directly).
Learning How To Invest Take Time… But It Is A Life-Long Skill Once Acquired
At times, you might have heard of some people who had just started to learn how to invest, giving up after a couple of months because they became frustrated about not getting the results they wanted.
The truth is, investing, like all other skills, takes time to master. If you have ever learned how to drive, I am sure you are aware that that you did not master the art of driving within just one week. But once you learnt how to drive, this skill-set remains with you for the rest of your life.
Similarly, when you have mastered the art of investing successfully, this skill-set remains with you for the rest of your life. And the good thing is, it is very possible for you to generate another source of income, even when the economy is in recession.