What’s your plan to build your wealth? Are you saving money and putting it into your savings account each month? Or, maybe you bought a few unit trusts from your bank, and an insurance policy from your cousin-agent? However you manage your money, how confident are you that you’re actually doing enough to be able to send your children to the best school available, or to retire the way you’ve been dreaming of?

Following a few basic rules and becoming disciplined about saving and investing can make the difference between reaching financial peace of mind or not. So whether you’ve been investing for years, or you’ve never invested before, here are a few things you should keep in mind to make sure you’re investing intelligently.

First, clearly identify your goals

How much money will you need to retire? How much money do you need to send all your kids to university, or to retire in the countryside and live off your savings? Whatever your goals are, the surest way to reach them is to understand what it takes to fulfil them, and then have a plan to get there.

A goal requires more than just a dollar value. Otherwise, it’s just a dream, and not a plan. Your goals need both a timeline and an exact amount needed. Then, you can build a savings plan by working backwards to figure out how much you need to save each month. If you can’t save that much each month, you either need to adjust your goal amount, or adjust your spending habits to accommodate your savings plan.

All these require some extensive calculations, which is usually a turn-off for many people. New investment players, such as StashAway, have built goal calculators to make goal-setting simple. StashAway’s feature will learn about you, your financial situation, and what you want to achieve, and then recommend to you not only a monthly savings plan, but will also build a personalised investment portfolio to get you there.

Second, saving is great, but investing is better

Let’s say you plan to reach RM1,000,000 and retire in 30 years. Saving RM2,000 each month for 30 years gets you only RM720,000; yet, if you invest those savings at 6% returns (after fees), they become RM2,000,000 with the power of compound interest. That quick math makes it clear that long-term investing can generate significant wealth for you. So, don’t leave your money under the proverbial pillow. Instead, let it earn compound interest and work for you. “Future-you” will live a more comfortable and fuller life, and would be begging you to start investing yesterday.

Third, take the right amount of risk for your timeline and your risk preferences

Not taking any risk by putting money under that proverbial pillow is a mistake, but so is takingtoo much risk. It can be true that taking higher risk can yield higher returns, but what’s missing in that adage is how long you’re investing. For a short-term investment period (3-5 years or less) with higher risk, you’ll face greater volatility, meaning you’ll likely get lower, or even negative, returns.

For longer-term goals (e.g., retiring in 30 years), you can afford to take more risk. Sure, markets will most certainly drop a few times in a 30-year timeframe, but when you stay invested over a long period of time, your investments will be rewarded when the markets bounce back way before you need your money for your retirement! In the long-term, taking higher risk will most probably reward you with higher returns, and that’s really where “high risk, high return,” is most applicable.

So be more conservative for your shorter-term goals (such as a house downpayment in 3 years), because you can’t afford to lose 20%-30% of your assets just six months before your down payment is due; otherwise, your dream 3-bedroom may have to be a studio! In summary: you can take more risk for longer term goals, less risk for shorter term goals.

This is why knowing your timeline before you start investing is very important.

With all that said, if you can’t stomach the ups and downs of the market even with a long-term time horizon, and you’re losing your sleep when your investment account is in the red, then acknowledge those feelings and don’t expose yourself to that much investment risk. If you take more risk than you should, you may end up freaking out when the markets volatility goes in the wrong direction, and making an irrational decision, such as selling your investments at the worst possible time (when the markets are down).

As you build your investment portfolio, make sure your start by looking at your timeline and your personal risk tolerance, and then choose an investment that is aligned with both.

Fourth, diversify, and never put all eggs in one basket!

There is taking high risk, and then there is gambling. Don’t treat investing as betting: you should not try to “get the right horse”. Instead, you should look to maximize the probability of reaching your goals. Any investment portfolio should include different asset classes, from US equities to Asian equities, from stocks in “consumer staples” companies to stocks in tech companies, from short-term government bonds to long-term government bonds, to corporate bonds, to gold, to real estate.

Traditional investment tools such as the examples above are usually risky and require plenty of monitoring, but new investment options are now becoming available to Malaysians. The Securities Commission of Malaysia has begun awarding licenses to investment technology players, such as StashAway, a robo-advisor. These companies manage portfolios with technology-driven algorithms, removing the human element (and risk) in your investment. Robo-advisors, such as StashAway, build diversified portfolios using ETFs (Exchange-traded Funds), and they’ll even build the diversified portfolios for investors.

If there is one golden rule of investment to follow, it is to never put all your eggs in one basket. If you put all of your savings to buy bitcoin in 2017, you probably know exactly what we are saying here.

Last, but definitely not least, keep costs low

A 1% per annum difference in fees can make a significant difference on your long-term returns. This is such an important topic that we wrote an entire article on it.

Most importantly, don’t wait

Don’t wait until tomorrow: set your financial goals and focus on how you can get there with a systematic, disciplined approach. Technology can help demystify investing, and start building a more reliable financial future for ourselves and our families. Robo-advisors, such as, StashAway can help all of us build a solid plan to reach our financial goals, and execute it in a few clicks without the need to become professional investors.

Head on to StashAway’s website to find out more today. There’s even a special deal for RinggitPlus readers!

 

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