To many, investing is a complicated subject and one that is overwhelming when you are new to it. It is confusing because:
- There are different types of investment products in the market. They include stocks, bonds, real estates, commodities, businesses and so on.
- There are different segments for each type of investment product. If we take stocks as an example, we have growth stocks, dividend stocks, value stocks, blue chips, small caps and so on.
- There are different methods of investing for each type of investment product. For stocks, you may choose to buy and hold, do short-term trading, invest via unit trust or EPF, short-selling and so on.
- Above all, many people “believe” they are investing when they are actually not. These people include traders, gamblers and even speculators and they make “investing” an even more complicated subject, especially if they profess to be successful “investors”.
What ‘Investing’ is Really All About
The subject of investing is made more confusing when people are not aware of the differences between:
- An Investment Plan,
- An Investment Procedure, and
- An Investment Product
Many today are still trying to get into investment products (stocks, real estates, unit trusts), or investment procedures (buy and hold over the long-term, short-term trading, dollar cost averaging) without having an investment plan. They also unconsciously follow the following order when buying their “investments”:
- Select Investment Products
- Explore / Test Out Investment Procedures or Strategies
- Have an Investment Plan, if ever, when needed
This investment approach is likened to building a house without first having a blueprint. This is not investing. Clearly, it is not a sustainable method for creating wealth.
What then is Investing?
Investing is a Plan, not a Procedure or a Product. Hence, a savvy investor would instead follow this path:
1. Have an Investment Plan.
2. Explore and Learn Investment Procedures or Strategies.
3. Select Investment Products.
As you can see, this is the exact opposite route taken by those who know how to build sustainable wealth over the long-term. I will touch briefly on the three points above:
Step #1: What is an Investment Plan?
An investment plan is like having a travel plan as illustrated below:
Say, I have to travel from Subang Jaya to Petaling Jaya in 20 minutes using X vehicle.
The plan will have four elements to take into consideration:
- Where You Are Now – Subang Jaya
- Where You Want to Be – Petaling Jaya
- Duration (Travel Time) – 20 Minutes
- How to Get There Safely – by X Vehicle
Likewise, investing starts with an assessment of your life. This includes your age, marital status, earning capabilities, financial condition, set of skills, tolerances of risk, expected returns, and a vision of your future self. Often, it takes quite a fair bit of soul searching to find your unique answers to the questions stated above. So, please take your time to do so. Don’t rush into it.
The first line of your investment plan should look something like this:
(A) I want to increase my monthly income from RM5,000 to RM10,000 in three years by using X strategies.
(B) I want to earn a passive income of RM1,000 a month in two years by using Y strategies.
(C) I want to grow my net worth from RM500,000 to RM1,000,000 in five or 10 years by using Z strategies.
What then are your X, Y, or Z strategies? Let us move onto Step #2:
Step #2: What is an Investment Procedure?
Let’s use the same travel plan from above:
I will be travelling from Subang Jaya to Petaling Jaya in 20 minutes by using X vehicle. Your X vehicle could be any of the following:
– A Car
– A Bus, or
– by LRT
If you know how to drive, then, you would choose a car. If not, you may hop onto a bus/LRT/Grabcar/Taxi to get to your destination.
So, the mode of transport is the procedure that will take you to where you intend to go. Likewise, the skills of investing are procedures that will act as the modes of transport to bring you to your financial destiny. The more skills you have today, the more vehicles you get to choose from to get to where you intend to be.
In travelling, some procedures include:
– Walking or Running,
– Riding a Bicycle,
– Driving a Car, or
– Flying a Plane
In investing, the procedures include:
– Working (get a job or starting a business)
– Saving (building cash reserves)
– Trading (Simple Moving Average (SMA), Exponential Moving Average (EMA), Bollinger Bands, etc)
– Investing (Growth, Value, Dividend, etc)
Step #3: What is an Investment Product?
An investment product is likened to an X vehicle: a Car, a Bus, LRT and so on. One vehicle is not necessarily better than the other. It all depends on suitability.
A car is not necessarily better than a plane. Likewise, investing in real estate is not necessarily better than investing in stocks, bonds, unit trusts, gold, EPF and so on.
Two guys may invest in stocks but their choice is for their own reasons. For example:
- Mr C aims to build a stock portfolio that earns RM1,000 a month in dividend income. He intends to buy and keep dividend stocks as long as their dividend yields are 5% and above. Thus, Mr C may consider an investment into a REIT that pays 6% dividend yields as the REIT fulfils his investment criteria.
- Mr D aims to build a stock portfolio that appreciates in value for the long-term. He intends to buy and keep stocks that have grown profits consistently and are expandable over the long term. Thus, Mr D may consider an investment in growth stocks as they fulfil the needs of his objectives much better.
In short, here are the key takeaways:
- Investing is a Plan, not a Procedure or a Product.
- A Plan helps to determine Your Procedures and Products.
- One Product is not necessarily better than another Product.
- Take time to do Soul-Searching.
- Your Plan will Advance according to your Skills (Procedures).
About the author
This article is co-written by KC Lau and Ian Tai.
Ian Tai is a Dividend Investor. Financial Content Machine. Producer of 200+ Articles, Weekly Host and Presenter at KCLau.com. Co-Founded DividendVault.com, an online educational membership site that empowers retail investors to build a stock portfolio that pays rising dividends in Malaysia and Singapore.
KCLau is a financial educator, having published seven books including the current bestseller Money Smart, and co-created a dozen online financial courses. He gives away his popular Money Tips e-book volumes free at his website: https://KCLau.com