Investing Basics: 4 Things To Look Out For When Making Investment Decisions
by Da Ruey |
Have you ever wondered about things such as personal finance and investments? In this new series on #MoneyMatters, Crunch is partnering with StashAway Malaysia —the digital wealth management platform powered by a data-driven investment framework — to teach you how to understand and manage your personal finance and achieve your financial goals.
In the first part of this series, we discussed personal finance and the basics of investing. This article will explain the investing basics in greater depth and 4 things to look out for when deciding whether or not to invest.
When investing, you have a choice of whether you want to do it yourself or let someone help you to do it. If you choose to outsource and allow a fund manager to help you invest, there are two forms of investing which are active and passive investment.
1. Active investment
Active investment is when the fund manager constantly tries to beat the market benchmark and provide you with a return of investment which is higher than the market rate. This has the downside which is that it is difficult to constantly outperform the market and there is a higher risk to suffer losses.
2. Passive investment
On the other hand, passive investment focuses on lowering investment fees while replicating the market return rates. The idea behind this form of investment is that by saving on fees, it increases the returns you are able to obtain.
Regardless of which type of investment you choose or a combination of both, it’s normal to act based on your emotions when investing. For example, you might invest only when you are in desperate need of money and be affected by feelings like greed and fear.
Therefore, to avoid making emotional decisions when investing, it is important to have a structured method to make investment decisions. Here are 4 things to assess and keep in mind when making investment decisions.
1. Your Timeline
The amount of time you have to invest determines the amount of risk you are able to take in your investments. If you have a short period of time to invest, you should take less risk as higher-risk investments are more volatile and you might not be able to recover from a loss. Also, in the short-term, you might need the money you used to invest for important things such as paying for a new car, vacation, or car and have to make a loss in your investment as you do not have the time to wait for the investment to pay off over a longer period.
If you have a longer period of time to invest (about 10 years and above), you are able to take higher risks when investing as you can wait out the ups and downs of a financial product and gain the long-term rewards of your investment.
2. Your Risk Tolerance
Understanding how much risk you are comfortable with taking when investing is an important factor as it allows you to make investment decisions that last for the long term. For example, if you are uncomfortable with a high level of risk but choose to invest in a high-risk financial product which is volatile, you might not be comfortable if its value drops by a large amount at a certain period and sell it before you are able to gain its long-term rewards.
It is important that your risk preference in investing reflects your personal situation, goals timeline, and preferences, and most importantly, hold on for the long term. A good rule of thumb is that you should take risks in investing that allows you to sleep peacefully at night.
3. Diversification in your financial portfolio
“Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio” (Investopedia). Different asset classes perform differently in a certain period of time and diversification spreads out and manages the risks in your financial portfolio. Similar to the idea of not putting all your eggs in one basket, this strategy aims to lessen the losses you make in bad markets.
Thus, when making investment decisions, remember to diversify your investments into different asset classes as it helps ensure that your investment does well in the long term.
*If you’re unsure about what asset classes are, you can read a brief introduction on what they are in this article about personal finance and the basics of investing here.
It is important to consider the fees you have to pay when investing. There are different types of fees such as entry fees, management fees, transaction fees and exit fees. It’s best to opt for investments that offer a payment of a flat or net fee compared to a percentage fee as every percentage of fees you pay decreases the returns you receive.
You should research and find out what the lowest fees are for any type of investment you are interested in. The amount that you save on fees will gain a compound interest and over a long period is a significant amount. Take this into account when making your investment decisions.
If you have been considering starting your investing journey but have struggled with making decisions, hopefully, these 4 things will be able to help you out. This is by no means a comprehensive list, so continue researching and finding out what works for you. All the best in your investing journey!
If you’re looking to start investing your wealth at a low-cost with risk-managed portfolios and ETFs, you could start with StashAway Malaysia. We have a special offer just for Crunch readers too! Sign up with this personal invitation and you’ll get a 50% deduction of fees for your first RM100,000 invested for 6 months!
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