We often hear people say that investing is too difficult and scary for them while there are others who say that they have no problem with investing their money. Why is this so?
In my experience, the extent of understanding a person has towards one subject will dictate their comfort level for it. When it comes to investing, having a reasonable level of understanding what you are investing in helps tremendously. And having the following traits will help you on your journey to become a successful investor:
- Not Afraid to Say “I Don’t Know”
If someone introduced you to a new product, scheme, or funds, don’t be shy to say “I don’t know”. While I understand people may have a tendency to “save face” or trying to look smart, it is perfectly okay to admit we don’t know about certain things. Be willing to ask the relevant questions as this will lower down the risks and unknown factors.
- Conduct due diligence
We need to do our due diligence, i.e., take reasonable steps to learn more and research, before investing into something new. Ask questions like where’s the source of income or profit coming from? Who’s handling the money? Is there a trustee involved? What are the costs involved? What are the risks? Is it regulated? Is there a defined exit strategy? What is the extent of liquidity and how long is the liquidity period? Investments that can let you exit at any time may be considered good in liquidity, but if the money only reaches you six months from now, anything could happen within these six-month period.
- Short-term debt clearance
Be sure to clear off any short-term debt especially credit card debt before initiating any investment. Your credit card debt will slap you with a 15%-18% interest p.a., and the effective rate is higher than the rate quoted due to compounding effect. If you’re not careful, late payment charges and interest on these late payment charges will cause a debt snowball. Therefore, if you think you have some free money to invest, by settling your credit card debt, you are indirectly ‘investing’ into something that can give you a guaranteed 15-18%. Unless you can find something else that gives you a stable and guaranteed return of 25%, it simply doesn’t make sense for us to ignore paying off our credit card debt.
- Have emergency cash
It is important to have emergency cash or a buffer fund. The size of your emergency fund is literally the strength of your ‘holding power’. If you invest into something without an emergency fund, chances are, when you have some unexpected spending or incidents, you’ll have to liquidate your investment regardless if it is at a positive or negative territory. This will help lower the risk of losing your capital.
- Not over-loyal to one asset class
Each asset class has its own peak and different levels of correlation through time. In times of stock market crisis, fixed income instruments may provide some stabilising support, and vice versa. A successful investment will involve a strategic asset allocation that suits the time frame and risk tolerance of the investor. By doing asset allocation we are actually managing the risks that inherently come with each asset class, and this will help to provide a consistent long-term portfolio return.
- Invest regularly, not once in a while
Set a structured savings program so that you get to invest your cash flow surplus regularly. This will produce a better impact on your wealth compared to only investing once in a while when you receive your bonus or ‘when I have the money’. A structured RM100 monthly saving program will ensure you saved RM1,200 no matter what happens, but the ‘when I have the money’ route may see you save nothing after 12 months. Be sure to channel the savings into some investing instrument, but not leave it in the cash account, or worse, in an insurance saving plan, which produce an extremely unfair and low IRR (Internal Rate of Return), and contrary to popular belief, can be quite risky.
- Master your emotions, not enslaved by them
We must accept that there is no way to get rid of emotions especially when it comes to investing. Always see the bigger picture and remember the reason and goals of investing in the first place. Do not stop investing during market correction or the crisis period. Research has proven that the one who has mastered their emotions will get rewarded when the dust is settled.
Kevin K.M. Neoh, RFP, MBA, CFP CERT TM is a Licensed Financial Planner from VKA Wealth Planners Sdn. Bhd, Malaysia’s fastest-growing home-grown financial planning firm. Kevin can be contacted at firstname.lastname@example.org or +6012-978 4282