What is Investing?

Introduction

When we acquire an asset or an item for the sole purpose of generating income or for capital appreciation for future, that is the basic meaning or definition of investment. It is a vehicle to generate or build wealth for everybody, regardless of your present wealth level. The not so wealthy can start small and increase their investment portfolio slowly or consistently.

Investing

Remember the cliché “work smarter not harder”?  Investing is exactly about that, it is about how to make our money work (harder) for us to accumulate value in the future, instead of us just working harder for it. Hence, it is important for us to set our financial priority right. Example, do you spend that year-end bonus on a new mobile gadget or stash it away in an investment portfolio? Setting it aside would of course be a wiser choice, either as a retirement investment or children education in future.

Compounding and time value of money

Money earns interest. That is obvious, unless we keep them under our bed all the time. Interest reinvested with the original principal amount would earn more money. After a certain period of time it grows exponentially. As simple as that. It isn’t rocket science.

A person who starts investing RM1,000 per month at age 30, with an average annual return of 8% would have grown his retirement fund to RM1.49m at age 60. Meanwhile, for a person of age 40 investing the same amount, same average annual returns would retire only with approximately RM0.6m at age 60.  A whopping difference of RM0.89m. That is what time can do to our money

It isn’t difficult to be a millionaire, right? We just need to start investing as young as possible.  The compounding effect on money is the surest way to accumulate wealth, especially if we are doing retirement planning or achieving any other financial goals.

Which types of investment?

This depends on two factors; investment horizon and risk tolerance. Different investors have different needs. There are many types of investment to cater for different needs.

Shares/Stocks: Investors can buy shares of stocks listed in Bursa Malaysia. This gives the investor the opportunity to gain certain ownership of participating companies in Bursa Malaysia. An investor needs knowledge, skills and expertise in order to choose the right kind. The volatility of the stock market can be very stressful for some. However, in the long term, stocks are excellent investment to overcome inflation and to grow the purchasing power of our money through capital appreciation.  Investor who do not want to subject themselves to the stress of managing their portfolio could engage professionals to manage their investment by investing in unit trust of mutual fund. Learn more about unit trust here.

Bonds: This is a debt instruments issued by corporate or governments to borrow money from investors. It promises to pay an fixed return over a fixed period of time.  Bonds issued by Malaysian government is called Malaysian Government Securities (MGS). Islamic bond is known as SUKUK fund. Bond provides a stable income for more conservative investors. Bonds are excellent investment for retirees who want a stable income during their retirement periods.

Unit Trust or Mutual Fund: Unit Trust or Mutual Fund is a collective investment vehicle for people with similar investment objectives. These people pool their financial resources together and invest in a fund which is managed by a group of professional fund managers.

It is a long term investment scheme. It capitalizes on the power of compounding interest to generate investment returns for its unitholders. Hence, it is not suitable for people seeking short term gains in the financial markets. It is a financial planning vehicle which is often used for retirement planning, savings, children education planning and also for a stable income, such as bonds and deposits.

Unit trust invests in different assets classes such as securities or equities, bonds, properties, deposits and commodities. It provides investors with investment returns in the forms of dividends and capital appreciation. It provides investors, in the mid to long term (3-20 years), a better returns compared to normal bank savings accounts and fixed deposits.

Alternatives: Investor can also choose alternatives investment vehicles such as properties, Real Estates Investment Trusts (REITS), Money Market, Fixed Deposits and Exchange Traded Fund (ETFs).

Creating investment portfolios and diversification

There is no perfect system or methodology to build an investment portfolio. It depends on our investment objectives, our financial goals and investment (time) horizons. When we understanding these factors, it  would allow us to plan our assets allocation wisely. Example, If we are planning for retirement, with an investment (time) horizon of 10 years and above, we have the time luxury to be a little aggressive in our approach. In this instance, we can invest in equities funds that would generate capital growth over the long term. Equities can help us to beat inflation and preserve the purchasing power of our Dollars or Ringgit. However, equities are more volatile and not good for those with short term financial goals. If we are planning for education, we may want to choose to balance it with equities and bond, and do not forget insurance. Education fund planning for our children is a different ball game. In this context, protection is as important as investment.

For mid-term financial objectives or goals, it is better to mix Equities, Bonds and Money Market.  Those already retired and more concerned with steady income, Bonds and Money Market funds would be a wiser choice. When we are building our investment portfolio, we need to consider the following factors:

  • What are our financial objectives?
  • How much time do we have? What is the investment (time) horizon?
  • What is the risk appetite?

Conclusion

We stress this again, let our money work harder for us. To achieve that, we need to have a plan and strategy.

  • Analyse our risk appetite
  • Analyse our investment horizon
  • Invest objectively, do not let emotions overcome us when making decision. Otherwise, we should engage professionals to assist us

Warren Buffett, the famous and successful investor once said “ you don’t need to be a rocket scientist to invest….”. What we need is a financial goal, plan and discipline. Investment and retirement planning are extremely serious matter. Don’t leave our financial future to chance and emotions. Most importantly, do not procrastinate. Start young. Let time and the compounding effect work to our advantage.

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Source: www.investopedia.com