Basics of Investing

Why invest? Can't we keep our money in a biscuit tin?

Many Singaporeans realise the importance of saving but have reservations about investing. Investing is often regarded as: “gambling”; “too risky”; “only for the rich”; “only for those about to retire”; “too complicated “; “not necessary”. While misleading, such reservations also deter us from investing. We then forgo the opportunity of growing our savings.

People often view investments as being very risky. In fact, investing is all about maximizing the returns on your savings using various kinds of financial instruments. Some of the more common types of investments are:
• Fixed Income Securities (Bonds)
These are debt instruments issued by either the Government or corporations to raise funds. Investors (lenders) are usually repaid the original investment amount at maturity. When you hold a fixed income security, you will also receive interest (or coupon payments) periodically.
• Equity Investments (Stocks or Shares)
Equity is a form of ownership in a corporation. An investor's stake in the corporation depends on the number of shares he owns as a percentage of the total number of shares issued by the corporation. Shareholders have the opportunity to benefit from capital appreciation of the shares and may receive dividends.

• Unit Trusts
A unit trust is an investment fund managed by a professional investment manager. It consists of investments in one or more of the three basic asset classes - cash, bonds and stocks.
• Investment-Linked Insurance Plans
An Investment-Linked Insurance Plan (ILP) is an investment fund managed by a professional fund manager, which has an added insurance component. Similar to unit trusts, ILP offers different investment objectives to suit the risk appetite of policyholders.

BASICS OF INVESTING
1. Identify your investment objectives and time horizon.
2. Consider the risks you can bear and your expected returns.
3. Decide on an appropriate asset allocation. This means how you allocate your savings among various asset classes including property, stocks, bonds and cash.
4. Consider how you can diversify your investments.
5. Conduct your own research to choose the right professionals who can help you with your investment.
6. Consider the transaction costs of your intended investments.
7. Monitor your investments closely and review your investment objectives periodically.

Not putting all your eggs in one basket is a sensible rule for investors. You diversify by spreading your investments over different securities in various asset classes. The asset allocation decision is one of your most important investment decisions. To do that skilfully, you will have to define your investment goals, time horizon and risk tolerance.

Time is a lever that increases your ability to grow your savings. The earlier you start investing to meet your financial goals, the more you can exploit the power of compounding. Time is also one of the most important factors in determining how much risk you should take. This is another reason to begin investing early.

More information on investments can be found in the MoneySENSE