A financial downturn presents opportunities for savvy investors who bear these pointers in mind. -ST
Mon, Jun 07, 2010
The Straits Times
By Gemma Tay
One does not require much money to start building up wealth. Each small step can take us a long way. What is most important is to remember the basics of wealth preservation and investing.
I run through a check-list of investment principles and review my investment portfolio annually to ensure I am effectively preserving and growing my wealth. Here are some investment tips.
Investing tip 1
It is better to remain focused and stay invested during volatile times
During volatile times, it is important to remember to stay focused and stick to your long-term investment strategy.
An investor who panics and sells his investments when markets are down is likely to incur losses.
In addition, he may also miss out on potential gains when markets recover. Historically, markets have rebounded and eventually returned to or even surpassed previous levels.
By investing over the long term, you can ride out the volatility.
Investing tip 2
The three Rs: Revisit goals, review portfolio and rebalance your investments
Over time, our financial goals and needs may change.
For example, you may want to set aside funds to cater to growing expenses when new members are added to the family. Your financial objectives will have to be reviewed to meet this need.
The components in your investment portfolio may also need to be readjusted to generate higher potential returns. You may do this by taking on more risks.
Even if your financial objectives or risk profile remain the same, market movements may tilt the weightage of each investment in the portfolio, exposing the overall portfolio to more risks than intended.
A rebalancing of the portfolio is required to bring it back to its original risk-return parameters.
Generally, you should review and rebalance your investment portfolio every eight to 12 months.
Investing tip 3
Spread out your risks, diversify
Diversification is important as most investors are not able to predict the performance or returns of one particular asset class.
Equities, bonds, different geographic regions, sectors or even various investment styles react differently to market events and cycles.
Hence, investing in multiple asset classes and types will help to buffer the impact of any non-performing investment in a portfolio.
Diversifying your portfolio can also help you weather the ups and downs of the market cycle.
Investing tip 4
Have a balanced portfolio
Invest in a balanced portfolio to better manage risks and returns.
A balanced portfolio is designed to achieve higher returns than debt securities or cash, but at a lower risk than a pure equities portfolio.
A fund offering a balanced approach should include both equity and fixed-income components, which can help to provide cushioning when either one of the asset classes is down.
Equities and bonds usually show low correlation to each other and behave in an opposite manner under the same market conditions.
Hence, when equity prices are down, bond prices usually rise, and vice versa.
Investing tip 5
Market corrections can mean opportunities; use dollar cost averaging to smoothen price swings
Market swings and volatility are part of stock market movements.
They present opportunities for investors to buy on dips or enter into dollar-cost averaging (DCA).
With DCA, a set amount of money is invested at regular intervals over a long period of time. It can lower an investor's cost of investment and reduce the risk of investing at a peak.
For example, when prices are high, the set amount can buy fewer investment units or shares. Likewise, when prices are low, more units or shares can be bought with the same amount. It helps to smoothen the ups and downs in market volatility.
Most importantly, bear in mind one golden rule: The chain is as strong as its weakest link.
Regardless of the size of your investments, be vigilant and disciplined when it comes to preserving, investing and growing your wealth.
The worst of the financial crisis may be over, but the global economy is not totally out of the woods yet. Lingering problems still exist, especially in the developed countries. However, opportunities exist even in the worst of times.
To stop investing is to allow your money to diminish in value as inflation will erode its purchasing power. Keep these basic investing principles in mind and let them underline your investment success.
The writer is the head of deposits, investment & insurance (Singapore) at United Overseas Bank
This article was first published in The Straits Times.
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