Investing is one of the key pillars of personal finance. When you invest, you are building a secondary source of wealth that you hope can one day replace the income from your day job.
However, investing is not without its own risks. As the saying goes, "when you expect higher returns, you need to be prepared to take on higher risks."
Here are five questions that you need to ask yourself before you embark on your investment journey.
1. Are you well-insured?
Think of insurance and investment as football players.
In football, we need both defenders and attackers. Insurance policies are like the defenders. They defend against scoring against you while investments try to score goals for you.
Before you start investing, you should take care of your insurance needs first. These would include health insurance coverage such as a hospitalisation plan and a critical illness plan.
It's important to remember that being well insured does not just apply to you but also your family members. This is because any unfortunate illnesses that strike them will also weigh on your emotional well-being and your finances.
Even the best investment plans may fail if your insurance needs are not adequately taken care of first.
2. What are your investment objectives?
Before you start investing, it would be ideal to understand your investment objectives in the first place.
This is important because your investment objectives will ultimately determine what you should invest in. For example, if your objective is to invest for your retirement, then you should look at long-term investment instruments such as the CPF Special Account and certain bonds, such as the Singapore Savings Bonds or highly rated corporate bonds.
On top of these, you can also look at other form of investment products that could potentially provide you with higher returns, depending on your risk appetite. Always be reminded that with higher expected returns come higher risks.
Some ways to reduce risk would be to have a longer time horizon for your investments and to consider dollar-cost averaging. This is the reason why it's better to start investing when you are younger, as it gives you more time to compound your returns.
If you are working with an investment advisor, sharing your investment objectives with your advisor would also ensure that he or she creates an investment portfolio that best fits your objectives.
3. How much can you afford to invest?
By investing, you are effectively stashing away money you have today to ensure that you have enough for tomorrow. While this promotes the important concept of delayed gratification, you still need to ensure that your current needs are not compromised.
For example, it would not be financially prudent to invest all your savings over the next 10 years when you plan to purchase a home in the near future as it may require a hefty down payment.
Always ensure you have sufficient spare cash that can be utilised in the event of an emergency. For many, this works out to be between six to nine months of your monthly expenses.
4. Monthly investing or lump sum investing?
Should you invest all your money at one go via a lump sum investment, or to invest periodically over a period of time? This is one of the basic questions that all new investors need to ask themselves.
Your answer to this question could determine what you eventually invest in.
If you were doing a lump sum investment, you would want to make sure you choose the right investments that would do well in the future. This could be in the form of investing in the right stocks and properties. Such investors are usually trying to time the market and require some knowledge of how to do so.
If you are planning a steady monthly investment, it means you are willing to ride out the short-term volatility of the market. You will be utilising a dollar-cost averaging approach as you buy more stocks when prices are low, and fewer stocks when prices are high.
5. What is your investment knowledge today?
It's normal to be unsure of what to invest in, especially when you first start out. Nobody is born an expert.
Be truthful with yourself. If your knowledge is limited, consider working with an investment advisor first. He or she can help you learn the ropes of investing while you continue to build your knowledge base over time.
Start out small. There is no point in putting in a large sum of money when you are unsure about the investments you are making. What you should do is to keep in regular touch with your investment advisor over how your investments are faring. By speaking to them frequently, you can easily build up your investment knowledge at little cost for the future.
If you would like to find out more about how you can grow your wealth, here are some investment products offered by AIA that you could consider.