INTRODUCTION TO PERSONAL INVESTING PART 2 - INVEST ACCORDING TO YOUR TIME HORIZON

Many Singaporeans know the importance of growing their wealth, but do not know where to start. In the second of a three-part series on Personal Investing, we discuss the concept of Investment Time Horizon. 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. 

Time is Money...

It is important to think about your Investment Time Horizon when you invest. This is the number of years that you have available to invest to achieve your financial goals. For example, if you are a 35-year old planning to retire at 60 years of age with a goal of saving for your retirement, your investment time horizon is (60 - 35 =) 25 years. 

Your investment time horizon and the level of risk you can take go hand in hand. The more time you have, the more flexibility you have. Your time horizon would influence how much your savings can grow, what assets you can invest in and how much risks you can take. If you need your money in a short time, you cannot take chances with your capital. You should invest in assets that do not put your capital at risk during this period. If your time horizon is longer, you can consider investing in more risky assets that offer potentially higher returns such as stocks. This is because you have time to recover from the periodic losses sustained by investing in the stock market and to benefit from any possible long-term upward trend.

The longer your time horizon, the more compounding works in your favour. A $10,000 investment giving a return of 5% per year compounded after 10 years grows to about $16,300; to $26,500 after 20 years; and $43,200 after 30 years. Here's a little tip to help you calculate how long it will take to double your money:

You should also consider Dollar Cost Averaging to reduce the overall risk of your portfolio over the long term. The idea is to invest a fixed sum of money at a regular interval, regardless of whether the market is rising or falling.  If you concentrate your investing only at certain times, you may be unlucky and buy when prices are at or near the peak. If you invest regularly, you may be able to 'average out' the effects of any highs or lows in prices.

Common Mistakes Made by Retail Investors

1. Not investing according to your time horizon.
Although some investors claim to be investing for the long-term, they cannot resist dabbling with short-term, high-risk ventures when they feel that the market is moving in their favour.  This may expose them to higher risks than what they are prepared for.

2. Not actively managing a long-term portfolio.
Although a longer investment time horizon protects you from short-term price movements, it does not mean you should ignore your portfolio. You should still have the discipline of checking on how your investment is doing from time to time.

3. Not being aware of the different investment instruments available.
Different investment instruments provide different returns for investors with different investment time horizon. For example, fixed deposits may offer steadier returns over the short term of say, one to two years, whereas stocks offer higher returns over a longer time horizon of say, 20 years.

4. Not matching your investment objective with changes in life stages.
Many investors continue to invest aggressively, even into their old age, as they forget to match their investment objectives with changes in their life stages. For example, if you are getting married or starting a family, you may need to adjust your investment strategies to provide for longer-term needs such as saving towards your child's education or your family's medical needs.

What You Should Consider When Investing

1. What investments should I consider?  Do your homework and look at various options: e.g. fixed deposits, bonds, stocks or unit trusts.

2. How long do I have to invest?  Decide on the right asset mix that will suit your investment time horizon.

3. How actively should I manage my portfolio? It's your money tree. While you may not need to tend to it every day, do not neglect it - make sure you set aside sufficient time to monitor your investments regularly.

4. When should I have an investment plan?  How often should I review it?  Milestones in your life such as getting married and starting a family are a good time to review your financial needs.

5. How liquid should my portfolio be?  While the idea is to invest for the long term, it is good to know how easily you can cash out your investments.

Be aware that depending on the risk of the investments you have chosen, you could lose part or all of the money you invest. As such, be sure that you are investing only with money that you CAN afford to lose.

"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".