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The Concept of Investment

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When we talk about investment, there are a few important concepts I wish to share:

According to a research on investment history return,  Asset Allocation contributes to the majority of historical returns. It means your investment should be in a portfolio which matches with your risk profile (conservative or high risk and so on) which should be properly diversified into different investment tools (such as Stock, Bond, ETF, REITS and so on), Region (Asia, Global, Europe) and Industry (Technology, Material and others) to ensure they perform better in all situations.

Diversification is always encouraged as we all know the risk of putting all your investments (eggs) in one basket.

investment risk profile
Risk profile portfolio table

The Risk Profile Portfolio Table is customised based on risk profile. However, this portfolio needs to be monitored from time to time and rebalanced every half year to make sure the percentage of each investment is still intact. (Sell some that have performed well and rebalance each investment percentage in the portfolio).

If your risk profile has changed, this will involve a major restructuring of your portfolio but do not be afraid to change it.

I used to invest in fund or stock that I liked and treated as an “individual”, but this did not give me a full picture of how my overall investment would look like, how much it is diversified and what the overall yearly return would be.

There was a time where my stock investments were too diversified into so many counters and made the tracking a tedious job to do and I missed the opportunity to lock down the profit when it rose.

The standard suggestion is to have about 10 to 20 stocks or five to seven funds in one portfolio but it also depends on the size of your portfolio.

Start Early to Use the Power of Compounding

The most valuable asset you have when you invest, is time. Every six years you wait to get started roughly doubles the required monthly savings necessary to reach the same level of net worth (let’s say 1 million of net worth).

Procrastination is a very painful and expensive mistake when it comes to investment or any other financial goal. So, you should get started it right away.

Referring to the book, The Millionaire Next Door, millionaires believe that one should start working early (after graduation) in order to utilize the power of compounding as soon as possible on the money earned.

This changed my mindset because I thought “the longer time you spend on studying (until Masters or Ph.D.), the shorter the working life”. My friend who is the same age as me graduated five years earlier than me and he has a better net worth position than me when we compared notes in 2015.

investment

Referring the picture on Getting a Headstart, if we have a constant monthly saving of 10,000 and 12% of the rate of return yearly, by starting to invest five years earlier, you can double your total investment value after 60 years, compared to those who started late.

Compounding is about the total value of the investment (capital plus interest) appreciating over the years. Do not wait to start only when you have a big amount to invest, a small amount can make big difference through the power of time.

For example, a RM10 fancy coffee you buy each day for 30 years, if saved at 10% annual interest compounds to an astonishing RM600,000 at the end of the period.

Dollar Cost Averaging

investment dollar cost averaging

If given a choice to invest monthly or yearly, choose the monthly option to take the advantage of Dollar Cost Average which can bring down the cost and get a better return.

Do bear in mind that the ground rule of this concept is to make sure you have done your due diligence(qualitative and quantitative) on this investment (stock or unit trust fund) and monitor the performance of the investment yearly. Do not hesitate to switch to other investments if the fundamentals such as performance, management team and so on, of this investment has changed.

About the author

This article is written by Yong Chu Eu. He is the Founder, Principal, MFPC Shariah RFP, CPD/CPE, HRDF Certified Corporate Trainer of Money & Life, Financial Book Author, Licensed Financial Planner, E2E Financial Literacy Principal Coach & Local Media Guest.

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