4 essential tips all investors need to know
Are you new to investing? Or have been doing it for a while? Even as a seasoned investor, are you getting the basics right?
As with everything else we do in life, it’s important to have a plan. This also applies to investing and creating an investment portfolio that suits your financial objectives. It is also one of the main ingredients to successful investing. Before you start investing, ask yourself some questions such as your investment goals and assess what you want to achieve.
Yanni Pang, Regional Sales Trainer of Franklin Templeton Learning Academy shares some quick tips on creating an investment portfolio and essentials of investment management.
What are the key considerations to look out for when creating an investment portfolio?
Yanni: It’s important to set clear financial objectives and investment goals from the start, such as having enough money for your personal retirement needs or even saving up for your child’s education. It’s also about understanding the rationale, ask yourself why you want to invest and what do you plan to achieve out of it. Then you will know your investment time horizon, which is how long you expect to stay invested. For example, younger investors with minimal commitments may consider a longer time horizon and take on more risk.
This may come as a no-brainer but not always easy to achieve. Try to diversify your portfolio well across different asset classes. For example, new investors with 10 years in time horizon and of medium risk profile can consider an equal split between equities and fixed income with some cash as a buffer. A small proportion can also be allocated to alternative instruments.
Lastly, contrary to popular belief, you should not review your portfolio too frequently and don’t switch your holdings too often. Especially for unit trusts, as long as you are not a speculator, you don’t have to monitor your investments every day and should consider staying put for the longer term. As funds are exposed to market fluctuations, investors who stay invested long enough may be able to ride out the market downturns.
What are the key investment risks one should take note when it comes to investing?
Yanni: It’s down to understanding and knowing how much risk you’re comfortable to take and if you’re setting a realistic investing expectation.
There’re also two main types of risks to consider when investing which are the Systematic and Specific risks. Systematic Risk affects all investments and asset classes, also known as Market Risk, which is created by general economic conditions and cannot be diversified. Specific risk on the other hand, affects individual assets which is specific to a certain security or company and can be reduced by diversification. Depending on your investments, there’re also other risks to consider, which includes inflation risk, interest rate risk and global economic risks when it comes to equity portfolios. However this is dependent on the diversification of your portfolio.
What is asset allocation and how can it suit my investment portfolio?
Yanni: It can be done with strategic and tactical allocation. Strategic asset allocation is a mixture of assets to help investors meet their long-term investment objectives as no one knows for sure how the global economy will perform. Therefore, it is hard to time the market and investors should perform the asset allocation at the very beginning.
For example, if you’re of an Aggressive investing profile, then you can consider going more with equities or alternatives. A portfolio dominated by bonds typically have a lower return and lesser risk, whereas a portfolio dominated by equities typically has higher potential returns but more risky.
Start by estimating your expected returns, which are correlated to risks, then set the allocation and rebalance as necessary.
Tactical allocation is one way to exploit short-term fluctuations in asset class returns and can be done by through fundamental analyses of economic and political conditions, market valuation measures relative to past data as well as trends and momentum in markets.
When should I opt for passive or active management for my investments?
Yanni: Rather than beating the benchmark, passive investment managers seek to replicate its performance, while active investment managers attempt to outperform a benchmark and try to time a market.
In terms of cost, passive management is typically cheaper to implement, and returns earned is also typically less than the index return due to costs. Active management may lead to greater transaction costs with more frequent trading.
Therefore, investors may choose a passive approach in some markets and active in others. Passive management is common practice for large-capped equities which are usually in developed countries where information is transparent. Active management may be more successful in Emerging Markets and Venture Capital (VC) where market inefficiencies may exist in emerging economies and there may not be a suitable index to track for VCs.
Investing with a purpose
With these tips on hand, anyone can start investing with a purpose and build an investment portfolio that makes sense for them. For a start, consider the dollarDEX investment portfolio by first taking a risk questionnaire to find out your risk profile before a suitable investment portfolio will be matched to suit your risk tolerance or start a regular savings plan without having to time the market!