Let’s start with us saying that we are not here to tell you the secret to a guaranteed investment return. But we are sharing the rules of thumb needed before entering the world of investment.
Money is involved here and we are not here to give out any financial advice. That can only be done by a properly certified financial planners — we’re just two lucky guys who got to chat with one.
We thought we could share what we’ve learnt from our conversation on the basics of investing — or the risk involved, to be specific. Here’s a boiled-down version:
1. Know your risk appetite.
Why should you do so
When it comes to investing, there’s a popular saying of “You need to spend money to make money”, but not a lot of people are comfortable with the idea of losing money. Once you start investing, you will start having second thoughts on whether your investments are the best choice. You may begin to ask:
- Can you keep up with the changes in price?
- Could you have earned better returns elsewhere?
- How likely will the company/organisation you invest fall?
Knowing your risk appetite is important before delving into the world of investing. It may depend on the different criteria on how you define your risk:
- How much are you willing to lose before investing?
- What are your financial goals before you decided to invest?
- How long are you expecting before seeing your return of investment?
Knowing your risk tolerance will guide you in selecting the best type of financial products or market. You will also be less likely to make an impulsive decision, and more satisfied with your investment’s performance.
What you can do
Take a risk tolerance questionnaire to understand your investor profile. You can find some on the internet, such as this one by Vanguard. A financial planner can also give you a more comprehensive insight and recommendations.
And just like how people change with time, risk appetite changes too. Remember to review every few years or so, especially with significant life changes.
2. If it’s too good to be true, it probably is.
Why should you do so
Be careful where you want to invest your money in: if you see a tagline of “No risk and guaranteed return”, you better start running in the opposite direction.
Every investment carries a certain degree of risk which can affect the rate of return you are expecting.
- If someone tries to convince you by planting in your head the image of how your life will change and you’ll become rich — don’t believe it.
- If the sales pitch use “everyone else is doing it” as a tagline — that’s a red flag.
- If the name and photos of well-known public figures (politician or celebrity) are thrown around — Remember, credibility can be faked, and photos can be misleading without proper context.
What you can do
- Do your research on the company that you are looking into investing.
- Be wary of unsolicited offers that come in the form of a junk mail or a sales pitch where there’s no current financial information that you can find online. Some of the offers may require you to invest offshore where it’s harder for you to track your money and easier for scammers to go off radar.
A good place to begin when you are suspicious is the AMBD Alert List — it is a constantly updated list of companies and websites “which are neither authorised nor approved under the relevant laws and regulations administered by AMBD or whose activities raise suspicion of illegal activity”.
3. Don’t put all your eggs in one basket.
Why should you do so
This is one of the common idioms that investors and future-aspiring-investors should know.
Putting all your money in a single investment can be a horrible move as you can lose it all in one go.
When you invest in different areas, you minimise the risk that any single event will impact your investment heavily.
What you can do
Some ways you can diversify:
- Investing in companies of different industries (eg. health, technology, mining)
- Buying shares of companies, or government bonds, from different geographic regions (eg. Europe, ASEAN)
- Investing in different types of financial products (eg. stocks, bonds)
And remember, only invest the amount that you are willing to lose.
4. Insurance to mitigate risk.
Why should you do so
Investing requires you to put in a sum of your money, however, there are other aspects of life that you cannot neglect, such as prioritising your debts, responsibilities of taking care of your family and possibility of getting expensive medical care for your health.
In a scenario where money is required elsewhere, your investment may be disrupted, especially if you are not receiving the rate of return that you are expecting.
Insurance is one way to prepare for anything. The rule of thumb in financial planning is built upon preparing for contingency (i.e. having an emergency fund and risk management). You want to rest assured that someone got your back covered.
What you can do
A simple explanation when it comes to insurance is to have it when you don’t need it. It acts as your backup to minimize risks.
In fact, if planned well, insurance can be multi-functional by managing your risk and as a form of investment too.
You can use a mix of different types of insurance to accomplish that.
Consult a trusted financial planner to get a recommendation that is optimised for your specific financial situation.
Closing
This is not an exhaustive list of financial advice and you should do your ow consider checking further information online at your own convenience before jumping into investment.
The financial advice that we follow based on our financial planners are:
- Understand your risk appetite
- Be able to identify scams and frauds
- Don’t put it all in one investment
- Have insurance to act as your backup
Since you’re here…
Why don’t you check out what Memori have in store for the month? Legacy Matters workshops are designed to educate people on preparing for their legacy at different stages of life.
We equip you with the know-how and resources required to navigate through the maze of life to reach your end goals — be that starting a family, achieving childhood dreams, retirement, old age, or even end of life.
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Written by:
Izaaz Syazwi — Part of Memori’s Digital Marketing team. Experienced in marketing. Copywriting and content creation. Izaaz’s favourite philosopher is Socrates.
Li En Ru — Project Lead at Memori. Content writer with 3 years of experience in copywriting and research. Formerly associate editor at Borneo Bulletin in Brunei. En Ru’s favourite food is this sticky stuff called Ambuyat.