People invest money to make it grow, hoping for a good return. I used to think that my money in the savings account is a form of investment. I am getting some return right, even though it is a minuscule return. I realize I was wrong in this case as instead of getting richer; I was getting poorer since the interest rate return was way too small to beat out the inflation rate.
Therefore, your investment should give a much higher return compared to the returns from your savings account or even your fixed deposit account. Investing your money requires some work or effort, for example searching for suitable instruments to invest your money in. Below are several concepts attached to investing that everyone should know about.
• Investing carries some risk
Investing in various different instruments or assets carry different degrees of risk. For example, investing in bonds can be considered to carry minimal risk whereas investing in options or warrants carry a very high risk. Therefore, investing your money does not necessarily guarantee a good return and instead can cause you to lose a lot of money. Losing money in high risk or dubious investment schemes is not uncommon and has happened to me and I am sure to a lot of other people as well.
• Reducing investing risk – diversification
Now you know why people have their money in several different ‘pots’ instead of one or two pots only. The money could be in the stock market, in real estate, in commodities, in government bonds, in unit trust funds, etc. People diversify to reduce their risk of losing money from one type of instrument or asset only. Investing in several instruments or assets spreads out the risk.
Something to keep in mind is if all your money is invested in low risk and low return investments, the returns generated may not meet your target. On the other hand, if all your money is invested in high risk and high return investments, you are exposed to a higher risk and the possibility of losing a huge chunk of your money.
• Start investing early
There is a time value attached to your money. The earlier you start to invest, the faster your money will grow. For example, if you start investing at 25 years old by dumping all your money (e.g. RM50, 000) into an investment that gives 8% annual return, after 30 years (at age 55 years old) the money will grow to RM503,133 with no additional investment from you.
• Rule of 72
Use the rule of 72 to estimate your money growth. For example, putting your money in a fixed deposit account which gives 3% annual return, it will take 24 years (72 ÷ 3 = 24) for your money (e.g. RM20,000) to double to RM40,000. On the other hand, if the return is 8% annually, it will only take nine years (72 ÷ 8 = 9) to double.
The rule of 72 can also be used to estimate the future value of your money. For example, if you assume the inflation rate is 5%, money in your pocket now (e.g.RM5000) will only be worth RM2500 (reduced by half) in about 14 years (72 ÷ 5 = 14.4).
• Dollar cost averaging
Dollar cost averaging or ‘ringgit cost averaging’ as in our case means investing a fixed amount of money each month into your investment portfolio. For example, you set aside RM250 each month for investment. This is commonly practiced in unit trust investment. When the unit price is low, you are able to purchase more units and if the unit price is high, fewer units are purchased. In the long run, the average purchase price will generally be lower. This strategy is suitable for a person who does not have a huge lump sum of money to invest and instead invest consistent small amount of money for a certain period into a specific investment account(s).
Reference source: Planning Your Investment. Banking Info. www.bankinginfo.com.my