Looking to start investing, but don't know where to begin? You'll do well to stick with these 7 golden rules.
The world of investments is subject to all manner of exceptions, confusion, and outright randomness. There are no real rules... once you’re an expert. Before you get there however, you’d best treat these guidelines as rules:
1. Don’t Follow the Herd
Price movements have to occur before the news can report it. An investment needs to perform well before thousands of people are clamouring about it. This means that, by the time there’s hype about an investment, the price of it has probably reached an all-time high.
If you follow the herd and buy because of hype, you will often be buying at peak prices. There is no guarantee that the prices can continue to increase, and you might be forced to sell it for less than you bought it.
2. Beat Inflation by 2%
Not everything that grows your money is a good investment. Remember that the rate of inflation in Singapore ranges from 3 to 4%. If your investment produces returns of less than that, you are still effectively losing money.
You should aim for investment returns of at least 5 to 7%. Most insurance policies can provide this, as well other mutual funds and index funds.
3. Diversify Your Assets
Purchase assets in lowly correlated industries. For example, you could consider spreading your shares between a medical company, a shipping company, and a property developer.
These companies have very little to do with each other, so a downturn in one industry (e.g. a downturn in property because the government imposes extra stamp duties) will not impact the performance of your whole portfolio.
The simplest way to diversify your assets is to place it in an index fund. Alternatively, you could find a financial adviser or wealth manager who is able to do this for you.
4. Don’t Invest in Something You Don’t Understand
When you don’t understand what a company does, you should avoid investing in it. If you cannot understand the commodities market, you may have trouble understanding why low oil prices are a serious threat to finance and coal mining companies.
The idea of a truly passive investment is a myth. There will always be times when you should intervene (e.g. deciding when to sell off an asset), and you cannot do so if you don’t understand what’s going on.
Furthermore, misunderstanding an investment can lead to serious problems in financial planning. You may get a lot less from an endowment policy after 15 years, because you failed to understand how--or how much--you were being charged for it.
5. Pay Off Your Debt Before Investing
If you have credit card debts or high interest personal loans, settle these before investing.
It is improbable that you can “out invest” your debt – most new investors find it a challenge to get returns of even 9%, let alone something that will beat a credit card’s 24% interest rate!
Consider consolidating your debt through zero interest balance transfers, or even by taking out a low-interest personal instalment loan to pay off your credit cards (thus reducing your interest rate from 24% to around 6 to 8%).
Check out SingSaver.com.sg’s comparison tools for help in doing so.
6. You Need to Invest AND Save, Never Treat Investments as Savings
Savings must be on hand for emergencies. You cannot easily get your money out of a mutual fund or structured deposit if you suddenly need cash for an operation (at least, not without incurring a serious loss).
Likewise, investments such as your house, or watches and jewellery, are too illiquid to be considered savings. In a crisis, you cannot expect to sell your house or E-Bay a $50,000 watch by this afternoon.
For this reason, you must have both a savings fund and an investment. If you currently lack the financial capacity to manage both, then save until you have six months of your income before you start investing (this might take a while, but you will be thankful that you did).
7. If Your Investment Goes Wrong, Wait at Least Two Weeks Before Making a New One
The worst time to make a financial decision is right after a serious loss. We have a tendency to “double down” just like gamblers--imagine a card player who loses a steep sum with one hand, then bets double on the next round to try and make it back. This is common behaviour among new investors as well.
In fact, even among seasoned traders and expert fund managers, there is tendency to get reckless right after a loss. We find ourselves panicked, anxious, and willing to clutch at anything that offers a chance at (financial) redemption. The result is usually an even bigger loss, as we take high risk gambles to make fast money.
Don’t let this happen. Take a step back, take a deep breath, and give yourself two weeks. Contemplate the lessons you’ve learned, before diving back into the fray.
You Might Also Want to Read:
How Much Should You Save Before Making Investments in Singapore?
What Is Emotional Investing And How To Avoid It
Is Investing Better Than Saving Money?
Singaporean Finance Bloggers Reveal their Investment Secrets
What Type of Fund Should You Invest In?
Investing Vs Gambling: All You Need To Know
5 Questions You Were Too Embarrassed to Ask About Mutual Funds
7 Golden Rules to Managing Your Money Like An Adult