If you’re a new investor who is about to embark on your investment journey, congratulations! You are taking that first step towards making your money work harder for you. With coreinflationhitting a nine-year high recently in Singapore, it’s become all the more important to allocate your money to strong, well-run companies for the long term. But before you hit the “buy” button, there are three things you need to be aware of.
Risk versus rewards
It’s healthy to feel optimistic as you set out to deploy your money. But too many young investors tend to focus excessively on the rewards while ignoring the risks. The aim of investing is to generate a steady return on your money that exceeds inflation. What you may not realise is that the path may be bumpy as the stock market is affected by all manner of news and events. Hence, share prices can head sharply lower in the near term, even when the business behind the stock is performing decently.
Take $DBS GROUP HOLDINGS LTD(D05.SI)$ for instance.
Singapore’s largest bank saw its share price surge nearly 76% in the last five years from S$18.77 to S$33. But it was hardly a smooth path upwards. In March 2020, the bank’s share price took a sharp 29% plunge to S$18.16 as the COVID-19 virus swept around the world. That’s why you should not allocate the money that you need in the next five years to the stock market. Evenblue-chip companiesmay suffer from periodic business setbacks.
$SINGAPORE EXCHANGE LIMITED(S68.SI)$, Singapore’s sole bourse operator, saw its shares hit a 52-week high of S$12.05 on 4 August. By the end of the month, the share price had tumbled by 18% to S$9.90 as the $Hong Kong Exchanges and Clearing(00388)$ launched its own China A50 derivative product. These two examples demonstrate how share prices can be volatile in the short term. Hence, it is crucial to evaluate an investment’s risk profile before committing your hard-earned money to it.
Don’t borrow to invest
If you have a strong conviction in a stock, you may be tempted to bet big on it. Banks and brokerages offer margin accounts where you can easily borrow money against the value of your shares. But here’s a word of advice — never borrow to invest. Not only is it highly risky as the market may suddenly turn against you, but it may also lead to nervousness and panic, thus harming your investment performance. By borrowing, you may have to “top up” your margin account should your shares plunge in value. And if you cannot do so, these shares will be forcibly sold off at a sharp discount, thus cementing your losses.
Control your emotions
Every investment operation should be handled with objective reasoning, logic and careful analysis. Emotionscan get in the way of achieving an optimal result. Common emotions revolve around greed and fear as money is involved in every investment. Greed may cause you to double down on an investment without doing proper research or due diligence, or to chase a “hot tip”. Conversely, fear may make you sell an investment in panic as its share price tumbles, even when there is nothing wrong with the underlying business. The key is to remain calm and analyse the situation first before deciding on your next course of action.
Unexpected, negative events do occur from time to time. But if you can keep your cool and stay rational, it will enable you to make a good decision rather than a rash one.
Get Smart: Taking small steps
Don’t worry if investing may seem daunting at first glance. Take the opportunity to learn as you go along, and you will slowly improve over time. The three pieces of advice above should be sufficient to start you off on the right foot. Over time, as you become more proficient at investing, you’ll start to reap the rewards of investing and get closer to yourretirementgoal.
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