Things to cover before you start investing
Now that KLSE has been performing well and every Malaysian owns a glove share, may I humbly says that I still believe in the foundation before we start investing. There are few things to be “invest” ready, or we might take too much risk in our financials. Here are something I think we ought to know before starting. You may also want to build these (e.g., emergency savings) quickly as we ride on the market swings.
Pay yourself first
The most important thing in investment is the availability of seed money or resources. If you are resourceful, you may find the funds out of thin air. If you are not, you need to spend less than what you earn to save money for investment. I started off saving 50% of my pay, and then inflation and lifestyle creep came in, now I aim to save 25% of my salary.
I used to (and still does) like a detailed analysis with lots of data. But I find that I am over complicating things with no purpose. Since our focus is to invest, use simple expenses tracker, or keep a spending journal. The aim is just to spend less than what you earn, maintain the desired saving rate; it doesn’t matter if the money goes to water or coffee or wine.
Traditionally we are asked to save 3-6 months for rainy days. But these days, the higher your pay, the longer it takes to find a full-time job. There’s research that shows that for every $10,000, it takes an extra month. Many of my coursemates took 1.5 years to find their dream job. So I am conservative here, I like to advise that you save enough for 9 to 18 months of barebone expenses.
Get basic insurance
First, buy medical insurance. Then, life insurance if someone depends on you for living. From a theory point of view, I like to avoid the investment-linked policy. But it’s the only one that I find with guaranteed coverage after an illness diagnosis. So I see it as an expense payment that reduces my anxiety when it comes to investment. I no longer need to think about protection after paying RM250-300 a month. Pick one within your budget and, preferably, less than 5% of your income.
Would you leverage it?
Leverage can be the best invention of this century. However, I don’t like margin accounts because there are forced to sell by the bank and can get complicated when it comes to payment. When the interest rate is low, I do consider personal loans as a tool to increase my funds for investment. It is easier to plan and cope with a fixed monthly payment, and you won’t be stress-up to top-up the margin call. Some people do this with housing. I am not so keen on property investing because there is less room for mistake, lots of fees involved, and timing is crucial.
Set your desired return
Our desired returns determine the type of investment product that you can consider. If you want to beat the inflation, you can’t do it by keeping funds in a fixed deposit. If you’re going to outperform the index return, you can’t do it by investing in index funds. If you are investing on fundamentals, do not sell a share until it rises above 20% of your purchase price.
Know what you buy
Finally, when you are ready to step into making capitalism work for you, make sure you know what you’re buying. A simple Google to confirm any rumors or best investment opportunities could help you to avoid scam and be a savvy investor. Mistaken Put or Call in warrants is just one of the examples that lots of retail investors are not informed or do a basic reading before investing.
Did you first invest when you are ready or dive in when the market is right?