Table of Contents
Principles of Investing
To start, there are no investment hacks and shortcuts. Investing requires time, research, and maintenance. Effort? Depends on the instrument. For instance, some asset classes might require more vigilance while others could mostly be a ‘buy and wait for maturity’ affair. Nonetheless, there is no instant fix to get you high investment returns.
For beginners and those who want a quick refresh on the main principles of investing, we’ve collected 9 crucial tenets.
1. Know that investing is a commitment
Investing can be compared to quality relationships. Both require patience and its close kin, time. There are more investment options available than ever on the market, with new ones like cryptocurrencies and P2P lending entering the mainstream. But before you choose “the one”, you must first determine your investment profile. Then, you need to mull over the pros and cons of various instruments before selecting those that best fit your purposes.
Time also applies to the investments themselves. Some investments allow you to cash out by a relatively quick maturity date. Others take longer. It also pays to take time and review your investments regularly. Depending on how the markets have moved, you may have to re-balance your investment portfolio to fit your personal risk tolerance.
2. Invest when you have enough savings
Everyone has a benchmark for how much savings is “enough”. But it’s essential to have several months’ worth of monthly expenses before you invest your money. Three months’ worth is a good baseline , but six months’ worth is safer.
If your savings account is stable, you have something to fall back on should you be faced with an emergency and need funds immediately. When all your money is tied up in investments during unexpected times, you may have to withdraw funds when the markets aren’t optimum or when your investments have not reached maturity – exposing you to hefty penalty fees.
3. Watch the inflation rate
The interest we get on our savings is rather insignificant, and when you factor in banks’ admin fees, our savings usually stay flat over time. What doesn’t stay flat, unfortunately, is the price of goods thanks to inflation.
Inflation is why we invest; we want to stabilize our purchasing power in the long term in order to beat inflation. To solve this, balance an investment portfolio that delivers overall returns above the inflation rate.
4. Know your personal risk tolerance
Know the risk and return principle, which declares that the higher the potential returns, the higher the risk – and vice versa. Because of the risk and return principle, everyone’s investment portfolio will look different as every investor balances risk and reward according to his own personal risk tolerance and future goals.
Aggressive investors might aim for instruments with the highest returns, no matter how risky. Their portfolio would generally consist of 80-90% high-risk instruments. Meanwhile, investors with a low stomach for risk will veer towards safer products such as guaranteed returns investment products which effectively guarantees returns to investors.
Age is often, but not always, a factor in determining risk tolerance. Rationally speaking, someone young and healthy, with enough savings and a long period of productivity ahead of him can afford to take more risks.
The idea of establishing your personal risk profile is to support you in building your perfect portfolio – one that reflects your personal preferences.
5. Stay Educated
As with jumping into anything new, you should always take the leap with eyes wide open. Do in-depth research and avoid investments you don’t fully understand. It is easy to fall into the trap of acting on “hot tips” from seemingly reliable sources. When entering unfamiliar territory, do consult with certified professionals and in the case of investments, consider engaging with independent financial advisors who only get paid for their time and do not stand to earn a commission.
6. Remember the Risk and Return Principle
Every investment bears risk and the risk-return trade off states that the potential return increases with an increase in risk.
Certain instruments can be stable while offering higher returns relative to other instruments, but there is no magic instrument with high profit and no risk, it simply does not exist. Be instantly wary of any suspicious offers of this nature. Investment scams have been on the rise in recent times, hence it is important to stay vigilant and do your own due diligence before making any decisions.
7. Diversify, diversify, diversify
How could you potentially mitigate risk? You diversify your investments. Diversification means allocating your funds among a variety of investments. The more you diversify your portfolio, the lesser your concentration risk. The more diversified your portfolio, the more protected you are.
Diversification is how you build your unique investment portfolio. In the case of P2P investments, diversifying across multiple notes & industries is one way to mitigate concentration.
8. Reinvestment is essential
When your investments generate earnings, you have several options. You can withdraw and cash out. But if you want long-term benefits, you could reinvest those earnings so they generate more earnings.
Say you invest SGD 10,000 into bonds with 7% annual interest. After a year, you have earned SGD 700 in interest. You decide to reinvest the total SGD 10,700 into the same bonds in year 2. SGD 10,700 now reaps SGD 749 in interest earnings rather than SGD 700 and you didn’t have to do anything additional. Over time, you would double your starting principal or more. The key is in diligence and frequency.
*The above example is for illustration purposes only
9. Invest early because time matters
The reinvestment principle especially shines when you start investing early. Let’s say person A starts investing at age 25 and reinvests every year. Then there’s person B who does exactly the same with the same initial amount starting age 35. By having a head start of 10 years added with the Principle of Compounding, person A could have nearly double the money of person B.
“Where do I start?”
For beginners, a good starting point would be to ascertain your own baseline and risk tolerance. In other words: how much would you be willing to lose? Reading and doing research on investment options in the market would also be a good first step. There are vast amounts of online resources to help you with that. For example, you can learn more about P2P investments on a platform like Funding Societies where we strive to make the concept easy for you to understand and pick up. Ultimately, investing could be simple but is, by no means, easy. Do consider setting clear investment goals and remain disciplined when delving into the world of investing.
Disclaimer: This article is not meant to constitute/be construed as a form of recommendation, financial advice, or an offer, invitation or solicitation from Funding Societies to buy or subscribe for any securities and/or investment products. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decisions as may be appropriate. View full disclaimer notice here
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