Building and Managing Your Portfolio
Getting started and what to watch out for
We are likely to save or invest because we want money for some future goal. If you are new to investing, here are some steps to get you started on an investment plan.
i) Setting goals
- What are your goals? Common goals include paying off your student loans, accumulating funds for retirement or saving for your children's education.
- Work out how much money you need for the goal.
- Work out when you need the money for that goal. The time you have available to invest leading up to when the money is needed is known as your investment horizon.
ii) How much can you afford to invest?
- How much money do you have available to invest, after paying for your household expenses, insurance premiums and debts, as well as after setting aside some savings?
- Can you cut back some expenses to free up more money for saving or investing?
- If your investment suffers a loss, will it impact your debt and other commitments, or other goals?
- Do not commit to pay or invest more than you can comfortably afford long term. Look for a cost-effective alternative.
- Do you intend to invest in one lump sum or fixed amounts on a regular basis (e.g. monthly, quarterly, or annually)? If the product requires you to regularly pay a sum, do consider what the penalties and consequences are if you miss some payments or are unable to keep up.
- How much time do you have / what’s your age? Do you have time to ride out short term fluctuations or losses, or to benefit from compounding?
iii) Know yourself and how some investing basics apply to you:
|What you should know or understand
||What it means
|Understand your risk profile or your need, ability and willingness to take risk.
||Your need to take risk largely depends on the returns you want. But your ability to take risk depends on factors such as the commitments you have, the length of your investment horizon, and how much capital you have and can afford to lose. Your willingness to take risks may be curtailed if your need and ability to take risk are low. We all have different risk profiles. Check out the Risk Tolerance Questionnaire at the Central Provident Fund Board (CPFB) website.
|Understand the basics of investing.
||Understand concepts like risk-return tradeoff. If you are uncomfortable about losing money, you may need to consider less risky products which may provide lower expected returns. Understand how portfolio diversification and asset allocation can help you achieve your investment objectives.
|Understand your investment objectives.
||These support your goals like building up retirement savings. For example, if you have already reached your savings goals, your investment objective may be capital preservation to protect what you have saved. If you have retired and need to have easy access to your retirement savings, your investment objective could be to ensure high liquidity investments. You might also want your capital to generate income. But if you are young and just starting to build your retirement savings, your investment objective may be capital growth or accumulation. In short, your investment objective is likely to be influenced by your risk profile and life stage.
|Work out the returns you need to achieve your goals (but make sure you can take the risk).
||Work out the returns (adjusting for transaction costs and inflation) you need to achieve your goals given the capital you are starting with and how much you need in the future. But do manage your expectations for returns so it’s based on a level of risk you are comfortable with. When looking for a product suitable for you, do shop around and compare what’s available before making a decision.
|Know what products you already have and consider how to build a diversified portfolio starting with these.
||You might already have some shares or insurance products that are bundled with investments, e.g. whole life or endowment participating or investment linked policies. Know how the new product could enhance existing portfolio of investments. It may be to replace some part of, or supplement or complement your existing portfolio.
Will a new product you are considering lead to you being over-insured or over-exposed to certain investments?
iv) Consolidate and prioritise your goals
After examining what you need, when you need it, how much you can invest, and the risk you can afford to take, you may need to reprioritise your goals. You might need to settle for a smaller house or smaller car, but it would be unwise not to build up adequate retirement savings and provide for adequate healthcare cover.
v) What steps should you take to achieve your goal?
This could be saving up or investing in a diversified portfolio of financial products to help you achieve what you need. Always keep the steps above in mind when considering what action to take. Choose your investments based on how it’s suitable for your needs and personal circumstances, how well you understand the product, and how it will fit in your diversified portfolio to reach your investment objectives.
Do find out whether you can manage risks or limit losses once you are invested. Remember there are products where you can lose all your initial investment, products where you can lose more than your initial investment and products whose market values go up and down. With the latter, do be aware that markets could be at a downturn when you want to take out your money, so it is important to monitor your investments carefully in case you need to liquidate or take other action sooner.
Do consider dollar cost averaging as a means to accumulating the assets you want.
vi) Monitoring performance, rebalancing and adjusting your investments
Investing is an on-going responsibility. Even if you can choose to be somewhat passive – investing mainly in unit trusts or funds that track indices - you should regularly review the performance of your investments to see if you are on track to achieving your goals. Keep watch over the factors which may influence the performance of your investments. You may need to take action if your investment is underperforming.
The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).