Too excited to invest? Thinking where to invest first?
As I have told you previously, I was too excited to invest as well. I started with stocks in 2008, barely a year after I started working. Back then I did not have life insurance yet, and I have yet to set aside 6x my monthly salary as liquid cash. Basically I was risking what little extra cash I had unlike what mommy said. I was to eager to earn bigger in a shorter span of time.
Not So Good Example
I’m not encouraging you to follow what I did. But personally, I have minimal regrets. Dealing with stocks early on and not in lesser risky investments first taught me to be prudent, leaning more on fundamental analysis and less on technical analysis. It taught me to take calculated risks, and risk only the money I can afford to lose. Am no stock market expert until now, I’ve had my share of winning buys and losing positions. Still a work in progress on the stock market but nonetheless it increased my risk appetite.
Your Investment O-H-A
Objectives – Horizon – Appetite. Let OHA be your guiding principle in choosing your various investments. Long-term objectives (e.g. retirement fund) allow you longer investment horizon, as such risk appetite may be aggressive. Medium-term objectives (e.g. kid’s tuition) call for shorter horizons and more moderate investments. Short-term objectives (e.g. major purchases next year) will have be placed in conservative investments, those that are highly liquid and less to nil risk of loss. Emergency funds should be kept very liquid and should not be risked at all.
An interplay of OHA should be established in choosing your investment options. Now listed below are a number of options.
Less Risky Investments First
With increased risk appetite, and a little extra amount, I was then more open to less risky investments. Have it your own way, anyway it’s your own money. But if you want to follow a general financial advice from financial advisers, you might want to consider it in this order (what I commonly hear and see). Looking at it, basically the ordering is by increasing risk (and return).
- Emergency Funds: Worth 6x monthly income or 6x monthly expenses. Should be very liquid, in a bank savings account or partially in a time deposit
- Life Insurance: Better be sure before anything happens to you! Do this while you’re young and single!
- Long-term/ High yield deposits: Minimal risk, minimal returns. Good for capital preservation but too conservative for long term funds
- UITF / Mutual Funds: Varied risk depends on the fund, but at least managed by professionals, smaller investment amount needed. Moderate to high risk appetite, for long term investments.
- Bonds: Stable earnings, but normally needs a huge amount to participate. Moderate risk, for medium to long term investments.
- Stocks: Need I say more? High risk (potentially high returns) especially for long term investments.
- Business / Real Estate: Will need more expertise, more capital, and more time. Not so liquid.
You can mix and match depending on your investment OHA. The younger you are, or the less immediate needs you have on the money to be invested (long term use), the longer your investment horizon is. Especially compared to someone who’s about to raise a family or nearing retirement. With this longer horizon, you can afford to be aggressive (but not stupid) in your investments to maximise gains and growth in the long run.
Since I was too eager, there were a number of times when I had to pull out my mutual funds, sell all my stocks and pre-terminate my time deposits just to have liquid cash. Just to meet cash flow requirements. Then back to zero.
The wisdom in setting aside some amount of cash will avoid unnecessary pullouts and sell-offs. The wisdom of setting aside for life insurance is that it makes you (or the ones left behind) a bit more ready for the inevitable death. At least the ending is secured.
And think about this, sum up all the premiums you have to pay for insurance (call this P) and divide this by your insured death benefit amount (call this B). This is your premium-benefit (P-B) ratio. Do you know of any investment with such a high ROI? If you honestly think you cannot earn the same amount of death benefit amount (B) by investing an amount equal to your premium payments (P) in stocks and funds and bonds etc, then getting the insurance is the way to go.
Nail at least the first two investments first then explore your way forward.
Unlike me, don’t be too eager to join the stock market without securing your immediate and unforeseen needs yet. The stock market will not go anywhere, it will just go up
and down in a vicious cycle.
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May you have a richer life!