It is done by the United Nations. Governments do it. Businesses do it. Managers of funds do it. It is done by millions of everyday workers, including factory workers and business owners. Housewives do it. Children and farmers alike do it.
“It” is investing here: the art and science of making, preserving, and increasing wealth in the financial markets. In this article, some of the most pressing issues in the investment industry are discussed.
Let’s begin with your goals. Even though it is evident that the objective is to increase wealth, there are three specific reasons why institutions, professionals, and individuals like you and I invest:
For Growth, i.e. for long-term growth in the value of their investments, investment professionals (such as fund managers) spend a lot of time balancing these competing objectives. For Security, i.e. for protection against inflation or market crashes. For Income, i.e. to receive regular income from their investments. You can do almost the same thing yourself with a little time and education.
The degree of risk with which you are comfortable should be one of the first questions you ask yourself. To put it another way, How much are you willing to risk losing? Your personality, experiences, number of dependents, age, level of financial knowledge, and a number of other factors influence your risk tolerance level. Your level of risk tolerance is taken into account by investment advisors so that they can assign you a risk profile (such as “Conservative,” “Moderate,” or “Aggressive”) and suggest an appropriate investment portfolio (more on this later).
However, knowing your own risk tolerance level is also important for you, especially when dealing with your own money. Instead of causing you pain, your investments should bring you comfort. There is no assurance that you will profit; It is possible for even the best investment decisions to backfire on you; “Good years” and “bad years” are always present. Always invest only what you can afford to lose because you never know when you might lose all or part of your money.
You will want to take some or all of your investment money out at some point. When is it likely to occur: in a year, five years, ten years, or twenty-five years? At this point, it’s clear that you’ll want an investment that lets you take at least some of your money out. Your investment timeframe, whether short-term, medium-term, or long-term, will frequently determine the types of investments you can pursue and the expected returns.
There is some risk involved in all investments. The relationship between risk and reward is one of the “golden rules” of investing: The risk you must take is proportional to the desired reward. The risk (and reward) associated with various investments can vary greatly; It is critical that you are aware of the potential dangers associated with any investment you make. There is no investment that is risk-free, and your bank deposits are no different. First, despite the fact that bank deposits in Singapore are rightfully regarded as extremely secure, banks in other nations have failed in the past and continue to fail. Moreover, the average inflation rate from January to November 2010 was 2.66 percent, while the highest interest rate on Singapore dollar deposits up to $10,000 was 0.375 percent. Simply leaving your savings in the bank was costing you money.
There are a plethora of investment types, or “asset classes,” available today. You are already familiar with some, like bank deposits, stocks (shares), and unit trusts, but you should be aware of several others. Some of the most typical include:
Investment-Linked Products (ILPs) include bank deposits, shares, unit trusts, exchange-traded funds, gold, and investment-linked products. The fact that ILP offers life insurance is its main advantage.
2 A unit trust is a pool of money that is professionally managed in accordance with a specific, long-term management objective. For instance, a unit trust might try to provide a balance between high returns and diversification by investing in well-known businesses all over the world. The fact that unit trusts do not require you to pay brokers’ commissions is the primary benefit.
3 There are numerous types of Exchange-Traded Funds (ETFs): ETFs that hold or track the performance of a basket of stocks, such as Singapore or emerging economies, are one example. commodity ETFs that hold or track the price of a single commodity or a group of commodities (such as metals and silver); and currency ETFs that track a single major currency or a group of major currencies (like the Euro). There are two main benefits to ETFs: On stock exchanges like the SGX, they trade like shares and typically come with very low management fees.
The primary distinction between ETFs and Unit Trusts is that ETFs are assets that are publicly traded, whereas Unit Trusts are assets that are privately traded, allowing you to buy and sell them at any time during market hours.
4 In this context, “gold” refers to gold savings accounts, certificates of ownership, and gold bullion. However, keep in mind that there are numerous other ways to invest in gold, such as through gold ETFs and Unit Trusts; and shares in companies that mine gold.
With the advent of the Internet and online brokers, there are now so many options for investing that even a novice investor with $5,000 can find several options that meet her goals, risk tolerance, and time horizon.
Basically, diversification is trying to lower risk by investing in a variety of companies, industries, and countries (and, as your financial knowledge and wealth grow, in various “asset classes” like cash, stocks, ETFs, commodities like gold and silver, etc.). Your Investment Portfolio is the name given to this collection of investments.
Diversification is important because similar investments tend to behave similarly during times of crisis. The Singapore stock market crashes of late 2008/early 2009, during the US “Subprime” crisis, and the “Asian Financial Crisis” of 1997, when the price of a lot of stocks fell, are two of the best examples from recent history. Investing in a variety of stocks to diversify wouldn’t have been very helpful to you in these circumstances.
Exemplifying compounding’s power and concept is the most effective method. Let’s say we have three investments: the first earns 0.25 percent annually; The second yields 5% annually; and the third pays out 10% annually. We contrast two scenarios for each investment:
The annual interest is taken out of the account without compounding.
The annual interest is left in the account (re-invested) with compounding.
Let’s take a look at the returns on all three investments over the course of 25 years, assuming that we begin with $10,000 in Year 0:
After 25 years, your investment will grow to $10,625 at a annual return of 0.25 percent; With compounding, your investment grows to $10,644 after 25 years.
Your investment will increase to $22,500 after 25 years of compounding at a rate of 5% per year; With compounding, your investment grows to $33,864 after 25 years.
After 25 years, your investment will grow to $35,000 with a return of 10% annually; With compounding, your investment grows to $108,347 after 25 years.
This demonstrates the significant effects of compounding and higher returns: You will receive more than ten times your initial investment if you combine annual returns of 10% with 25 years of compounding. Furthermore, returns of 10% are not at all improbable: Even with some losing years, educated investors who actively manage their portfolios themselves and practice diversification can achieve even higher returns.
To achieve their financial objectives, people of all ages and backgrounds require individualized, practical guidance in developing their financial knowledge and skills. We’ve tried to make it easy for you to understand some of the most crucial ideas and principles throughout this journey in this article.