Tuesday, September 20, 2011

Investment Basket 2

Now I have talked about the investment basket 1 in the previous post titled "Investment". Some of you may have already save enough money for whatever they need and now they have extra money that they don't know what to invest.

Invest in property?
Invest in stocks?
Invest in currency?
Invest in other derivative that everyone is talking about?

Most who don't know what to do with their money will usually put their money in fixed deposit. While Fixed Deposits will provide you interest in a rather safe environment, you're actually losing your money.

Most people forgot about one thing call INFLATION.
Just like your salary, you've got increment from your employer every year (Or not?) but most of the time you will feel that the amount of increment provided is not enough to cover the expenses which got more and more expensive. Why is this so? Is because of INFLATION.

For political reason, most of the data provided by the government doesn't seems happening in real life. I still remember when one bowl of mee is still at the amount of RM1.80 and that probably was 15 years ago. Then RM2.00, then RM2.30, then RM2.50, then RM3.00, then RM3.50, then RM4.00 then ........ (and so on).

You see this inflation thing is one of the thing that caught up with you no matter how you save your money. I'm not saying saving is not good but somehow if you wish to have a life of a financial freedom (or any other term some people called), I will think that inflation is one of probably the many reasons that is blocking it's way.

You may earn a 2% interest for your hard earn money placing as deposit to the bank and with inflation 5% you may be losing 3% out of amount you place with your banks each and every year.
3% a year and 10 years later you'll felt that your money is 30% off its original value. Probably even more than that.

Whatever that can be bought with RM10,000 will not be the same 10 years down the road. And with the same RM10,000 you have with you which you save earlier, you can only spend with a value of about RM7,000 (or less). How good is that?

That is why investment is so important after saving.

Back to the Investment Basket 2.
What to invest after I have enough saving to keep myself out of any unforeseen circumstances at least 6 - 8 months and at the same time having extra money to invest.
Right!! You don't invest your 6 - 8 months saving. That is pure saving, you can only put in deposits or fixed deposit which will bring you some small interest but can always save your ass when you're in trouble.

Let's look at some of the market data before going into detailed about the type of investment to go in.
Why? Because as Warran Buffet says "Risk comes from not knowing what you're doing" and that is why I like you to know more about how each and every pieces work.

1. First we've understand that with saving, we're potentially losing to inflation.
2. We also know that we need to invest in order to multiplied our money.

Let's look at the data below:

For the last twenty years, the best investment you could have made are in stocks. They have achieved an average  compounded annual return of over 12.08% in the US, 8.57% in Singapore and 1.52% in Malaysia. Meaning if you're investing in stocks  and you get 12.08% return on your investment every single year, it will allow your money to double every 5.96 years!

You may ask "If the market can earn me so much of money why is there so many people losing money is stocks?"

Just like what Warran Buffet said. A lot of people lose money because they don't have the financial intelligent and the knowledge to invest.
Bear in mind, the amount of return above is not by buying one single stock, it is buying all the stocks in the indices to provide you with that return. Yes. Buy the whole market to get the return.

And that is the beauty of an open-ended investment. Also known as collective investment scheme, mutual funds, or unit trust.
These are the funds that gathers money from all the smaller investors and put them together, invest a large chunk of them into the market base on the objective of the same investors and benchmark against certain performance.
What will be the benefits?
1. When all investors gather their money, the fund manager can invest into more instrument or asset classes like "buying the market".
2. It will be cheaper on the trading cost due to the large fund size.
3. You'll have professional fund manager to help you manage and you don't need to monitor daily on the stock price.

Of course I only mentioned about benefits at this point of time. There will be some disadvantages as well investing in these funds but once you know the way to invest, you can always profit from such investment scheme.

I shall talk more into mutual funds / unit trust next in my post.
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