Shawn Yap AEPP® ChFC®/S CFP® SAMP™
Financial Advisory Director, SingCapital Pte Ltd
This article is contributed by SingCapital and reproduced by PropNex
Making a successful investment can be simple and straightforward, yet the process can be complicated to begin. An essential part of maximising one’s savings, the following 7 steps may be useful in making the investing journey appear less daunting for the layman, while possibly granting a good rate of return over a period of time.
Here, we shortlisted the steps you will need to take in order to create a recipe for an effective and successful investment plan.
Step 1: Purpose
In the 7 Habits of Highly Effective People, author Stephen Covey once said, “Begin with the end in mind.”
With this said, you need to be clear on your investment objective. Ask yourself. Why are you investing? What do you want to achieve with your investments? Do not invest just because your friends are doing it.
Having a clear purpose for your investment journey would ensure your commitment to stick with the remaining steps ahead. Simply hoping to achieve a higher interest rate than the bank may be too general and far from what a smart goal should be, which calls for specificity.
You would want to think of the following questions. Is this to park a portion of your emergency fund? Or for the down payment to purchase a car or property? Is this meant to fund your children’s education? Or is this your retirement nest egg? You would likely have many goals you wish to achieve with your investment. Thus, it is important to understand your wants and needs before allocating your resources and budget.
Step 2: Experience
Next comes your experience in investment. Do you have experience in this? How far does it stretch and how did you fare in the past?
Both direct and indirect exposure to investments can be equally beneficial and detrimental to your investment decision. If you have made money in the past, you may suffer from Confirmation Bias and assume that you will always make money.
However, if you have lost money in the past, you may suffer from Loss Aversion where you fear even the word, “invest”. But know that every experience is a good opportunity to learn the reasons behind every profit and loss as you accumulate wisdom along the way. Look at both sides objectively and find lessons in them. There are no bad investments, only bad investors.
Step 3: Risk Profile
This is a very important tool to assess your risk appetite and tolerance. It cannot be the only thing you rely on when investing. In investments, some assessments tend to be skewed towards certain categories. More often than not, young investors will almost always fall under a higher risk category simply because of age and a supposedly longer investment time horizon, even with the absence of investment experience.
Therefore, you need to have a deeper conversation with your financial planner on the past performance of the investment, especially in a market downturn to determine its true characteristics. Another acid test is to ask yourself how large a negative return can you accept, and for how long can you psychologically endure that. To cite an example, a globally diversified 100% equity portfolio can drop as much as 50% and stay in negative territory for several years in a major economic crisis.
Identify your risk tolerance and ensure that you are able to psychologically weather through your decisions, good or bad. This will ensure you are making sound and rational decisions through your investment journey.
Step 4: Empower
If you are jumping on the investment bandwagon already, you might want to further your interest in investment by taking courses conducted by reputable and regulated entities like SGX. Avoid courses touted to make you rich or seminars that promote unregulated investments.
Alternatively, engage a good financial planner to educate and coach you. Find out what are the common pitfalls of investors, especially for beginners. Although prudent investing does not give you a 100% sure-win experience, being prepared for different market conditions would support you in the long run.
Step 5: Framework
Often overlooked and considered insignificant, this is the step that most investors often miss. Some portfolios appear scattered, while some are too concentrated. Some may even be exposed to unnecessary risks.
It is said that when one “takes care of the risk first, the returns will take care of itself.” An “aggressive” investor may focus too much on the potential return and forget about the risk. Meanwhile, a “conservative” investor may avoid risk altogether.
In such circumstances, you need to understand that managing the risk characteristics of an investment portfolio through a framework allows you to achieve the highest possible return with the lowest possible risk. Wealth management organisations like Temasek and the Government of Singapore Investment Corporation (GIC) have their own investment framework.
Thus, it is a good idea for you to always have one of your own. An example here is the asset allocation framework, which is a process of diversifying your investments into different asset classes and geographies.
Step 6: Strategies
This is also something that most investors are unclear of – strategies and steps to cope with consequences. In the case if your investment were to drop by 10%, 20% or even 50%, what do you intend to do? Do you buy, hold or sell? These simple actions can result in a huge impact on your portfolio.
Thus, it is important to strategize and always have plans to cope with good or bad consequences following an investment. Professional traders have a trading plan to guide their trading decisions. As an investor, you or at least your financial planner should also have an investment mandate that will help you make sound investment decisions at critical junctures of your investment journey.
In addition, there is also a difference between investing a lump sum from your current resources, and a yearly or monthly sum from your regular savings. Some strategies like dollar cost averaging works well for regular savings invested in diversified portfolios over a longer term, but may not work as well for individual stock counters.
Step 7: Product
It may come as a surprise to many that looking at products comes last when building an investment plan. Investors tend to try and look for the best miracle product without going through the first 6 steps, and the success of such a move is often unpredictable. The investment products that we eventually choose are meant to fit into our investment and personal profiles ——not the other way around—— and this is where those steps can provide the clarity we need to select the most suitable product.
“Risk comes from not knowing what you’re doing.” – Warren Buffett
Now that we walked you through all 7 steps which are crucial in building an investment plan, identify and understand each step to your own. The important thing in investing is to know your limits and risk tolerance, as well as have a sound strategy. As wise investors, most like a challenge, not risks so be sure to go in prepared.
And alas, if you find yourself stuck in a rut even after weighing all possible options, you may need a professional’s opinion. In this case, schedule a visit with us or book a free consultation with our trusted and renowned representatives.
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