Understand how investing works, and you just increased your money-growing opportunities two-fold.
Opening a bank account and making it grow is the most elementary knowledge that we have of investing. But when do we stop saving up and when do we start investing? Raul Ylanan, an independent financial consultant, says the key is in knowing your goals. “Identify what future financial requirement you are investing or saving for: Is it retirement? Education for the children? Your first home? Once you have done that, you can look at the various investment vehicles available to you,” he says.
When considering investment options, it is best to be business-savvy, but not all people are born with this instinct. Coming from Ylanan himself, “a business or finance degree is not required to be successful with money. In fact, the advanced degree will not insulate you from financial losses. Just ask all those investment bankers, traders and brokers on Wall Street who are now unemployed!”
Entrepreneur sits down with Ylanan and asks what you should consider when investing, and the pitfalls to watch out for.
1. Look for investments with superior returns
Look into investing into products such as mutual funds and similarly managed investment products. Ylanan explains: “Managed investment products provide 3 key advantages. For one, experienced fund managers will oversee the day-to-day performance of the fund (or investment portfolio), so you don’t have to. Second, the power of multiple investors’ funds pooled together into one large fund provides access to superior investment returns that an individual investor would not enjoy. And third, managed investments are regulated by watchdog agencies to ensure that they operate within well-established risk control requirements.”
The major pitfall, though, is that the investor loses some control over where the money is placed, but this only paves the way for a newbie to learn more about risk management.
Moreover, the best investment you can make is on yourself. “If you are married or there are relatives or family members who depend on you for support, consider some form of life or accident insurance coverage for yourself as well,” Ylanan advises.
2. Do your homework
In whatever business endeavor, do a background check of the institution you are partnering up with, especially its past performance. “When you study their historical investment performance, pay particular attention to how they did during times of poor market conditions or economic downturns. If they weather challenging times well, chances are they are worthy to manage your hard-earned money” says Ylanan. Moreover, make sure that the institution discloses all the important information and that they make regular updates on your investment. Don’t be shy or apprehensive about asking questions. Remember, it’s your hard-earned money that is on the line.
3. Accept risks
There is no investment without a risk attached to it. Ylanan points out that this is the most common problem that investors, especially newbies, overlook. Acceptance of risk will eventually lead to the ability to manage risk well. “Successful investors (and investment managers) are those who can deliver reasonably high returns for a given amount of risk exposure,” Ylanan points out.
He also emphasizes the need to know one’s goals. “[For example], if you are investing for retirement, then the level of risk you are comfortable with is a function of how high a priority your future retirement is to you, and how many more years you have in which to achieve a sufficiently large nest egg. Secondly, it is better to have a plan so you can be guided toward the goals you set. A plan can also help keep you on track when personal and financial circumstances change along the way,” he advises.
4. No “special knowledge” needed
With all the successful SMEs sprouting right and left, it is evident that one does not have to have special knowledge or technical competence to enjoy a good investment performance. “The financial services industry is constantly evolving to provide more and more options to their customers. So specific skills aren’t as crucial as gaining a basic understanding of your own tolerance for risk, the minimum level of return you will be happy with, and the amount of time you are giving yourself to achieve your investment objective(s),” explains Ylanan. When it all comes down to investing, time and resources are important tools in formulating long-term financial plans. “Outline the ideal mix of investments into a portfolio that specifically addresses your objectives in a structured manner, looking out 5, 10, 20 or even 40 years into the future. Of course, you can also seek this type of advice from a professional advisor,” he points out.
5. A fat bank account is not your only option
Although there are investment opportunities aplenty, don’t forget to still leave a portion of your savings in the bank should you decide to go ahead and invest. This will serve as a liquidity fund to cover your daily expenses. Although saving up in the bank is important, Ylanan recommends that it should not comprise too large a portion of the total.
“You will be missing out on a whole world of better opportunities if you continue to believe the bank is the best place for your money will grow. Understand that banks make money by attracting deposits on which they only have to pay you around 1 or 2 percent interest per annum, then those same funds are loaned out to people buying houses, cars or expanding their businesses at terms that allow them to charge somewhere between 7 and 10 percent. Those same opportunities are available to you with other investment vehicles beyond parking money in the bank,” he continues.
When it comes to investing, be realistic and expect risks, but make calculated decisions for bigger returns. More often than not, it is ignorance that holds people back from investing. As Ylanan explains “we avoid an investment option not because it is inherently bad, but rather because we don’t understand how it works. It is the lack of information that makes us fear it. So arm yourself with information, and make it a habit to scan over the business and finance sections of the newspapers. There are many effective, innovative and secure investment opportunities out there. All you have to do is look.”