Navigating the financial world can be daunting for the novice investor. But overcoming the fear of investing can become one of the single most overpowering self-improvement hurdles to master.
With a $80,000 yearly income as a sales manager, she saves about $1,500 every month. When it comes to emergency funds, Michelle Tan has squirrelled away living costs that can last up to eight months. But like many women, the 30-year-old is consciously saving but finds investing “scary”.
And the fear stems from a lack of knowledge in financial products and how they work. Indeed, with the vast options and the risk of investing, it can be intimidating for a novice.
But investing with a clear (financial) goal in mind helps connect your money to your investments. Without it, it’s pretty much like jumping in the car and driving aimlessly without a destination in sight.
So there are a few things to consider in a “check list” of what’s a suitable investment for you, says Josandi Thor, head of consumer banking at CIMB Bank Singapore.
“You should ask yourself what is your investment ‘time horizon’, and understand your own attitude to risk,” she says. “If a falling stock market keeps you up at night, then you should consider less risky investments.”
She adds: “When assessing an investment product, look at what is the minimum investment amount and/or period involved, and enquire about the proportion of the capital, and if returns are guaranteed, where applicable.”
Josandi points out that one should expect investments that are more risky to come with greater expected returns.
“New investors should consider less risky products, and then gradually move up the risk ladder as they gain more investment experience,” she advises. In short, take it slow and steady.
Here’s where to start
A good place for beginners to start are the capital-guaranteed solutions such as structured deposits (SD). These tend to offer “participation” into investment products, while guaranteeing your capital upon maturity.
An example: An SD that matures in a year that gives a return based on the price of gold. If, in a year, the price of gold goes up by 5 percent, the returns are 5 percent. If the price of gold drops by 5 percent, you get back the full principal with no additional interest. But if the SD is withdrawn before the maturity date, the redemption will likely result in capital loss.
Some insurance endowment plans can also provide steady returns, while guaranteeing your capital upon maturity. The trade-off for these “safer” investments is that they often require the investment to be held for a period of time, say five to 10 years.
Endowment plans are life insurance contracts that pay out a lump sum after a specific term (on its maturity) or on death. It typically matures in 10, 15 or 20 years. Josandi says: “They can be used as a low-risk way to save and can be relatively flexible as policyholders can choose how much to pay each month, and how long they want to save for.” Note though that cancelling the policy before the maturity date can also lead to losses in capital.
Set aside sufficient emergency cash to tide over a six-month period.
– Josandi Thor, head of consumer banking. CIMB Bank Singapore.
Access to global markets
Another popular way to invest in the financial markets are through unit trusts (UT). These are well-diversified portfolios managed by fund managers, investing into a wide range of securities such as equities and fixed-income instruments.
Raymond Tan, head of wealth management and segments of CIMB Bank Singapore, says: “The UT investments are not guaranteed and come with the possibility of capital loss, if the fund is sold at a price lower than when it was purchased. However, UTs give investors the opportunity to invest into global markets with the convenience of daily prices to buy and sell. The UT is therefore an effective wealth management tool that investors should consider, if they have a long-term investment horizon.”
You can invest with just $100 a month
To get started, many investments, in fact, do not require a large amount. For example, investments such as unit trust funds start from $1,000. Although amounts for structured deposit investment vary, most start from $10,000.
Investment amounts for endowment plans vary depending on the type of plan, with some starting from as low as $100 per month.
Diverse investment portfolio
While investment options are largely the same for big and small investors these days, the choice of investments may differ.
Generally, a high income earner would be able to take more risk compared to someone with an average income. Hence, she will be able to allocate a larger portion of the investment portfolio into riskier assets such as equity funds – a fund that invests in stocks.
But one can’t just look at the stocks you own as your portfolio. A portfolio comprises so much more – your emergency cash reserves, insurance coverage, funded retirement accounts, real estate holdings, and even your professional skills that determine the income you can potentially earn, in the event you lose your job and have to start over.
And, asset allocation is important because it has major impact on whether you are well-positioned to meet your financial goal. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal.
For example, if you are saving for a long-term goal, such as retirement, most financial experts would agree that you will need to include at least some stock or stock mutual funds in your portfolio.
But what’s more important is to invest with the right mindset and discipline, Raymond emphasises. This is because very little can be achieved by speculation (second guessing the market).
He adds: “So if you have committed to a long-term investment of, say, 30 years for retirement, then I would encourage you to stay on course and not be swayed by market volatility.”
Unit trusts give investors the opportunity to invest in global markets with the convenience of daily prices to buy and sell.
– Raymond Tan, head of wealth management and segments, CIMB Bank Singapore.
Don’t let fear and misconception stop you from investing, says Josandi Thor, head of consumer banking at CIMB Bank Singapore.
“A lot of fear in investing stems from the lack of understanding of the financial products that one is investing into. This is perfectly normal and I’d say that it’s even a good thing to have this fear as a ‘defence mechanism’ in place.
Having said that, you should always understand what you’re investing into, and never hesitate to clarify with your financial adviser if there certain aspects of the investment product that you do not grasp.
Another misconception: some young women may feel that they need to have a large amount of money in order to invest. This isn’t true as many investments offer regular payments as low as $100 per month. A regular contribution together with the power of compounding can grow into a substantial investment portfolio in the long run.
Then, there are those who worry about the need to set aside money for unexpected needs, and are unwilling to lock their funds up into an investment. That is understandable and prudent.
The solution to this problem is to maintain a good balance. A general rule that many investors follow is to set aside sufficient emergency cash to tide over a six-month period. Remember: Holding too much cash isn’t always a good thing as cash tends to yield low returns, particularly in current low-interest rate environment.”
THE LANGUAGE OF MONEY
What financial advisers may throw at you: lingo that’s abstract and intimidating. Don’t get deflated and lose the (money) plot.
It measures fluctuations in the price of a security, or an index. Higher volatilities indicate higher risk.
There are some volatility scales that indicate the level of risk, for example, from a scale of 1 to 10 – a higher rating means higher risk.
02 Bull and Bear
Bull market is used to describe a market (that’s the stock market) that is on an uptrend. It would typically mean that the asset class such as stocks rise in value for a period of time. Each asset class has its own market.
A bear market, on the other hand, indicates a downtrend, where prices are falling. Some reasons for a bear market are high unemployment rates and a faltering market as a result of falling share prices.
It’s the abbreviation for foreign exchange, which can be as simple as changing from one currency to another. It can also involve trading currencies on the foreign exchange market. The market determines the value that is also known as an exchange rate.
An asset is liquid if it’s easy to find buyers and sellers and can be easily bought or sold. Financial assets such as stocks, bonds and unit trust funds are often considered to be liquid as they can be easily and quickly converted to cash, and vice versa. But there are times when the market can be “illiquid” for these instruments, leading to a widening of prices between buyers and sellers.
This is a measure of returns that an investor gets on the amount invested in a security. It is generally expressed in terms of a percentage, calculated annually. For example, a stock is purchased at $100 per share that pays a dividend of $2 per share in that year. The yield works out to be 2 percent ($2/$100).
It’s the short form for Loan-to-Value – an amount a customer can borrow up to, based on the value of the collateral.
For example, a house is priced at $500,000 with a LTV of 80 percent. A buyer who wishes to utilise the maximum LTV will be able to borrow up to $400,000. The borrower will need to pay $100,000 outof-pocket.
This information is for general information only and should not be relied upon by the reader. The information does not take into account the specific investment objectives, financial situation or needs of any particular reason. Advice should be sought from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. Any mis-statement or non-disclosure of material facts may affect the validity of the policy. In the event that the person chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her.