INTRODUCTION TO PERSONAL INVESTING PART 1 - HOW TO AVOID PICKING THE WRONG INVESTMENTS

Many Singaporeans know the importance of growing their wealth, but do not know where to start. In the first of a 3-part series on Personal Investing, we highlight some of the common mistakes that retail investors make when investing, and provide tips to help you understand your investment objectives.  These tips are taken from the 'Introduction to Personal Investing' handbook produced by the Investment Management Association of Singapore (IMAS) under the MoneySENSE national financial education programme. 

Common Mistakes Made by Retail Investors

1.  Blindly betting on 'Hot Favorites'
Do not invest in 'hot picks' or 'trendy stocks' which you know nothing about just because others are buying them. Always read up on any investment that you are interested in, and ensure that it meets your overall investment objective.

2.  Not diversifying
If you invest all your money in a single asset, you may lose all your money if that investment fails. Spread your money among a number of different investments, to ensure that you are not exposed to a single source of risk.

3.  Falling prey to aggressive sales tactics / sweet-talk
All financial advisers are required to disclose to you any commission that they will receive, and do a proper financial needs analysis before recommending an investment product that suits your risk profile and investment objectives. Do not get carried away by a good sales pitch or promise of high returns. Read the fine print and ask as many questions as you need.  

4.  Haphazard investing
While all investors share the same ultimate objective of seeking a good return on their investments, it makes sense to first have an overall game plan set up before you start investing, so that you can check that your portfolio is balanced and that you are meeting your investment objectives. 

5.  Not being aware of fees and charges
Remember that you will incur certain fees and charges on your investment. Check what these are, so that you are clear how much is your return after deducting these costs.

Understanding Your Investment Objectives:

Be clear about WHY you are investing, and what you hope to achieve with your investment.  Some common investment objectives are:

- Capital Preservation
This means that you are investing with the aim of preserving your capital, i.e. you do not want to lose the original sum of money you had invested.  The type of investments available would generally be less risky assets with lower returns.  It is common for investors approaching retirement age to adopt this as their investment objective, as they have less time to recover from market downturns.

- Capital Growth
This means that you are investing with the aim of growing your capital, i.e. you aim to increase the market value of your original investment amount.  As you are seeking higher returns for your investments, the risks that you take on are also higher.

- Income
This aims to provide you with a regular source of income.  If you are looking at income as your investment objective, you will consider investments that give you a regular source of income, e.g. cash deposits or bonds with higher interest payouts, or shares that give steady dividends.

- Liquidity
This allows you to convert your investments into cash quickly.  If you are looking at investments that provide you with liquidity, you will consider whether there is a ready market that is willing to buy your investments, and whether there are any costs to redeeming your investments ahead of maturity.

While your investments may be able to meet a few objectives at the same time, be clear which is your most important investment objective, as that will guide you in the type of investments and the investment strategy that you should take. For example, if capital preservation is your main objective, you cannot afford to take too many chances. As such, investing the bulk of your savings in shares will not be suitable for you.

Be mindful as well, that at different life stages, you may have different priorities and may thus have different investment objectives. Review your investment objectives regularly to ensure that your portfolio matches them.

Questions To Ask Yourself Before You Invest:

1. What are my investment objectives and investment time horizon?

2. How much of my spare cash / CPF funds do I have available for investment? 
[As a rule of thumb, you should ensure that at any point in time, you have set aside cash savings equivalent to three to six months' of your monthly income to provide for an emergency, before you invest.]

3. Am I able to service my mortgage or other financial commitments (e.g. insurance payments / saving for my child's education) should my investments fail?

4. How does the investment's historical rate of return compare against what I am currently earning in my savings account / fixed deposit / CPF Ordinary or Special Accounts?
[You should be mindful that the historical performance of an investment does not guarantee its future performance.]

5. How much risk or volatility can I bear? 

"These articles were provided by the Monetary Authority of Singapore and the Investment Management Association of Singapore (IMAS) as part of the MoneySENSE national financial education programme. For more information on personal investments, please refer to the MoneySENSE website at www.moneysense.gov.sg or IMAS' website at www.imas.org.sg".