Investment tips

Posted on April 24, 2008. Filed under: Investing, Uncategorized |

 Just some general tips on investment:-

 

1. Put a certain percent of our income towards savings, particularly long-term savings such as a retirement plan/child education planning. This will help ensure that you stay well ahead of inflation. For eg, if I were to invest RM1,000 per month for the next 15 years, with average rate of return of 8% pa, the future value of the invested sum would be RM340,000. Whereas if the same amount is being saved at normal saving account with minimum interest, the total saving by end of 15 years would be RM 180,000.

2. How do you decide whether you should invest directly in shares? Simple. If you haven’t got the time to learn about stock markets, to follow the progress of companies or to track your portfolio, rather invest in unit trust funds. 

3. If you do invest directly in shares, your two most important considerations should be ensuring that you have a properly diversified selection of shares across the stock market sectors to reduce risk, and regularly rebalancing your portfolio. When a share rises in price, you should consider selling some, but not all, of these shares, so that you make a profit, but your overall portfolio remains proportionally the same as it was when you started. By doing this, you’ll be able to reap further profits if the share price continues to rise.  

4. Generally, “savers” and “investors” have different objectives for their money. “Savers” plan to use their money in the next 3-5 years, while “investors” won’t need their money for five years or longer. Many “savers” want liquidity or quick access to their money without penalty. Then perhaps Bonds should be the choice. Bond provides a desirable saving or investment vehicle for many reasons. Bonds tend to be safer than stocks because if you hold bonds until the maturity date, you don’t risk the principal. Plus, bonds can provide a regular, steady source of income (typically, interest payments are received every 6 months). However, bonds tend to have a lower return than stocks over the long term.

5. If an investment product is too complicated to understand, avoid it. It does not mean you are stupid. It simply means that the product provider and/or financial adviser are trying to confuse you. You should not invest until you fully understand the product and the associated risks.

6. If you are a true investor, you invest for the long term and you don’t panic when markets fall. If you want to invest for the short term, you should use a bank fixed deposit or a money market account rather than an investment in the equity markets.

7. It is time in the market and not timing the market that counts. Don’t try to time markets. Few people have got rich from doing this and most have lost money. The best way to get rich is to take time to select an investment product that has properly diversified underlying investments, and then to stick with it for the long term. Most people make the fundamental error of buying into an investment when it is at the peak of its performance and then selling out when its value has dropped. I have made a few of these expensive mistakes. Believe me, it was painful!

8. Investing on a regular basis is a good strategy in volatile markets. If markets rise, your investment improves in value. If markets fall, you get more for your money, and you’ll benefit when markets go up again. This is known as dollar-cost averaging.

9. Don’t become emotionally attached to shares. If a particular share bombs out for good reason, such as bad management or failure to adapt to new markets, get out. But if the share value is falling as part of a general sector downgrade, there is little reason to sell. No wonder when Warren Buffett was asked how he became so successful in investing, he answered: “we read hundreds and hundreds of annual reports every year.”

10. If you are trading shares for short-term gain, you are not an investor, you’re a gambler. Don’t be surprised when you make a loss. Well, again, I am sharing with you my personal experience….

 

11. Being a contrary investor can make all the difference. As investment Guru Warren Buffett once said: “Be fearful when others are greedy. Be greedy when others are fearful”

 

12. Never invest on an ad hoc basis. You should have an overall financial plan designed to meet all your financial needs, taking into account your investment goals and life assurance needs. Investing in something simply because someone (friends, relatives, colleagues..) recommends it, is unlikely to help you achieve your financial targets.

13. Be prepared to pay for good advice, as you would for any expertise. But make sure you deal with an adequately qualified adviser. You are lost because you are not equipped with investment knowledge, so why go to someone for financial advice if that person is not properly qualified as yourself?

14. Always have an emergency cash fund. Ideally, the fund should be equal to three months’ income. This way you will not have to cash in investments at an inopportune time or take out a high-interest loan if you are suddenly landed with a major expense.

15. For regular saving, try to arrange your direct debit to channel money into investment as soon as after the pay day so that you will not “accidentally” spent away the money. Believe me, this is a practical advise!

 

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2 Responses to “Investment tips”

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Investing on a regular basis is a good strategy in volatile markets. If markets rise, your investment improves in value. If markets fall, you get more for your money, and you’ll benefit when markets go up again. This is known as dollar-cost averaging.

i don’t understand this part. could you elaborate on this?

Hi Azhan,

Welcome to my blog.

Basically dollar-cost averaging (DCA) is a process of you investing at regular intervals, usually monthly, which allow you effectively put your investment programme on autopilot. This helps to eliminates the problem of marketing timing.
Let see why this is worth doing.

Let assume we have Mr. A, put asides RM 500 each month into unit trust. It price rises and fall in tandem with the stock market’s condition. When the unit price of his fund is low, Mr. A buys a lot more units with RM 500. Likewise, when the unit price is high, his RM 500 will buy lesser units. So, what would happen over time? As months and years pass by, it is highly likely that Mr. A buys his portfolio of units at average price that is much lower many of those that buy lump sum at a single price. Let’s assume the price of the fund from Jan to June changes as follows:-

Jan’s price @RM1.00 ;invested units=500.00 units
Feb’s price @RM0.75 ;invested units=666.67 units
March’s price @RM0.73 ;invested units=684.93 units
Apr’s price @RM1.01 ;invested units=495.05 units
May’s price @RM1.30 ;invested units=384.62 units
June’s price @RM1.05 ;invested units=476.19 units

Total invested amount=RM 3,000(RM500 X 6 months); and total units invested=3,307.46 units
So, His per unit cost equals RM 0.91 (3,307.46 units /RM3,000). The averaged cost is much lower than his first entry cost of RM 1.00.

Let’s look at another way to illustrate the power of DCA. Mr. A bought the fund at RM1 in January and now dropped to RM 0.75 in Feb and 0.73 in March. He would have lost 27% as of March if he has not opted for DCA investment method.
Since he has constantly invested in the same fund monthly, his average cost has reduced to RM 0.81, or a lost of 19% as of March instead of 27% as shown above. When the fund’s performance improved to RM1.01 in April, he has made a profit of 19% instead of a mere break-even if he had only invested once while the price was RM 1.

So, under current roller-coaster market situation, investor like Mr.A will be the big winner! Why? Because his cheaper acquisition cost will likely allow him to reap a larger profit when the share market improved.

Of course you can say, well, if I were to put in RM 1,500 one lump sum when the price was RM 0.73 won’t it be better? OF COURSE! But this require your expertise in timing the market. If you are not good at timing the market, then DCA would be the next best investment practice that you can adopt. Honestly, none of us can time the market, the market is simply too unpredictable which I suppose it is also why it creates many window opportunities for the smart investors to capitalise the bargain…

I hope the above info is helpful.


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