How Not To Invest

By ShareInvestor

Daniel Buenas cautions against widespread errors made in the investment game

So you've started a trading account, read up on basic investing, and are all set to join the ranks of Singapore's retail investors. But before you do, perhaps it's best to understand some of the common mistakes that some retail investors fall prey to.

This week, we take a look at some tips on how to avoid picking the wrong investments.

Blind Following The Blind

Never just "follow the crowd'. Don't invest in "hot stocks' just because other people are buying into them. If you know nothing about a particular stock but you're looking to invest in it, then do your research and make sure it meets your overall investment objective. There's a term for people who jump into stocks hoping to make a quick buck: they're called punters, and they're as likely to lose money on their investment as they are to gain. Unless that's what you're looking for, don't just follow blindly.

Diversify, Diversify, Diversify

There's a story that's often reiterated by financial guides and books: if you invest half your money in a company that makes umbrellas, and half in one that makes sunblock, then come rain or shine, you are likely to average out your gains and losses. Though simplistic, this story illustrates an important point: if you invest all your money in one asset, you could lose all your money if that investment fails. Thus, it is always advisable to spread your investments through a number of different investments so as to minimise your risk exposure.

It's Not Always Show Me the Money

Don't fall prey to aggressive sales tactics or sweet-talking financial advisers. All financial advisers are required to disclose any commission they will receive from an investment product that you purchase, and they are supposed to do a proper analysis of your risk profile and investment objectives before they tell you what to buy. Read the fine print for any product offered: just because someone offers you the world - or promises high returns - doesn't mean he or she can deliver or guarantee them.

Count All The Costs

Any investment that you make will incur some sort of fee or charges, so be sure to check what these are. Without factoring these in, you won't know how much your returns really are worth after deducting the costs involved.

Don't "Tikam Tikam'

If you're really ready to start investing, then you should have an overall game plan set up before you take the plunge. All investors are seeking returns which suit their goals, but without a game plan, its like wandering into battle without knowing your objectives. With a proper plan, you can check that your portfolio is balanced and that you are headed in the right direction. Here are some of the more common investment objectives:

Capital Preservation

This refers to those who invest with the aim of not losing the original sum of money you had invested. If this is what you're looking for, then you should be looking at less risky assets with lower returns.

Capital Growth

This refers to investing with the aim of increasing the market value of your original investment amount. Take note, though: higher returns means higher risks.

Income

Some investments give you a regular source of income - for example, some cash deposits or bonds with higher interest payouts or shares that give steady dividends.

Liquidity

This refers to how quickly you can convert your investments into cash. If you're looking for investments which provide you with liquidity, you should consider whether there is a ready market that is willing to buy your investments. Also pay attention to any costs to redeeming your investments ahead of maturity.

Of course, you can have more than one objective, but be clear what is more important to you. Take note too, that at different stages of life, your investment objectives are likely to change. Review your investment objectives regularly to ensure that your portfolio matches them.

"This article "How Not To Invest" by Daniel Buenas was first published in The Business Times on 12 Sep 2005 and is reproduced in this blog in its entirety."

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