About 10 years ago, I was working for a non-profit entity. As you probably know, non-profits don't pay market rate salaries. I saw my yearly increment rise by a mere 2%, which was minuscule, given that my salary then was already so low.
I liked my job. It was fulfilling and creative, and I had lots of room to explore and experiment. But the pay was just.... not rising fast enough. I needed to find a way to earn more money. In fact, my boss encouraged me to take a second part-time job, just so that I could earn enough because he knew he couldn't pay much.
Back then, I didn't know much about money and how it works. So I called the one person whom I thought knew about this subject, and asked him to give me a crash course on money, savings, and investing. That began my journey into the world of personal finance.
One of the things I learned over the years was about investment and what it is for. Investment makes it easier to earn more money.
There are only two ways to earn money:
- People working for money, which is what you do at work; and
- Money working for money, which is what you do when you invest.
However, even before you even start exploring your investment options, here are four things you must know as you learn how to start investing in Singapore:
What is your objective for investing? How much money do you really need?
To beat inflation?
Because that's what all the financial professionals tell you that you must do?
It is true that the interest for savings accounts alone is insufficient to beat inflation. We invest so that the value of our money doesn't depreciate due to inflation. But that alone usually isn't a sufficient reason for investment.
To supplement your income?
We invest to grow our money passively. Most people would say that they don't earn enough. Using money to work for money while we are still working helps supplement our income.
To reach goals?
Most people need investments of some form to reach their retirement goals or other life goals such as buying a dream car or home.
To earn money when you cannot work?
Our potential to earn money decreases as we get older, because it becomes harder to find work the older we are. At some point of time, even if we wanted to work, we would not be able to. At this point, we can use our accumulated money to work for money.
What is your investment time horizon? When will you start needing the money?
Investment usually has a mid to long term time horizon. Mid-term is 5 years, long term is 8 years or more. The main principle behind investment is the power of compounding. The longer you leave the capital there, the more you gain. This means that once you've invested the money, you should not touch it for the whole duration.
Here's a tip: Invest only money that you do not need in the next 5 years. For short term goals less than 5 years, try to save towards them instead of investing, unless you are willing to take a lot of risk.
What is your expected return, based on the capital you'll be investing?
Are your expectations realistic? Have you considered the risks of your investments?
Risk comes in two forms:
- The outcome of losing part of or all of your capital
- The outcome that you may not reach your intended investment goal
Depending on the risk involved, investment returns typically range from around 1% p.a. (fixed deposits) to 9% p.a (stocks). Any investment over 9% p.a. is considered to be very high risk and should be carefully studied and considered.
As a general rule: if you don't understand the investment and can't explain how it works to a 9-year-old, don't invest in it. It is also very risky to put all your eggs into one basket. Lumina Planners use Strategic Asset Allocation to reduce investment risks through diversification, and improve returns.
How will you respond when your investments go south (and they will)? How do you know, and what should you do then?
These and other factors determine your risk appetite:
- Make-up of your existing investment portfolio
- Investment knowledge and experience
- Investment strategy
- Source of income i.e. salary, rental, business
- Capability to withstand a financial crisis or loss of income
- Financial obligations and debts
- Investment time horizon
Know what you're doing
Many people start investing blindly without knowing the answers to these questions. Having these answers is much more important than knowing what to invest in and how!
For our clients, investment is just one part of their holistic financial plan to achieve their life goals.
Find out more about what holistic financial planning can do for you: