Friday, 24 August 2012

Which Investment Should I Choose?

Investment has become a necessity in life, though this subject is still not taught in schools.

No one likes to lose money, but if someone keeps the money under his pillow or in the piggy bank for 10 years, he will "lose" money 10 years later, as the money will lose its value due to inflation.

For example, now you pay 1 dollar for a cup of coffee, after 10 years, the same coffee may cost you 2 dollar. If your 1 dollar now does not "grow" to 2 dollar after 10 years, you will lose your money value.

If we use the compound interest calculator (in the sidebar here) to calculate, we will need to have an interest rate or investment return of 7% annually for 1 dollar to become 2 dollar in 10 years.

So, it's clear that something should be done to "grow" our money to offset the inflation, which is about 3-4% annually. There are many kinds of investment vehicles, we have to choose wisely according to our risk tolerance.

In Malaysia, placing our money in savings account with pathetic interest rate will certainly cause you to lose money. If we put the money in fixed deposit, we may just be able to break even with the inflation rate. Thus, fixed deposit, together with bonds, are considered low-risk or conservative investment. It is suitable for those with low risk appetite or when time is not on their side.

The world is quite fair, we get lower return with lower risk investment and vice versa. So if we wish to get higher return, then we should turn to other investment like stock market.

For those who are interested and have time to study the stock market, they can buy the stocks by themselves. For those who are not interested or have no time, they can invest in unit trust/mutual fund, where they let fund managers to manage their investment in stocks/money market by paying some management fees.

In stock market, there are low risk and high risk stocks too. We can choose blue-chips stocks for consistent dividends but lower capital appreciation (unless we buy at very low during recession). In the other way, we can search for a growth stock with relative small market capitalization so that our money can have a chance to grow exponentially if we are successful.

Of course, we can make money or lose money in the stock market. When the overall market is not right, any stocks can plummet. If our time frame for investment is short, we should not put too many of our eggs in stock market.

There are other investment vehicles such as forex, options, futures, commodities etc, most of these are of higher risk.

Besides, real property is another good way to grow our wealth. It has been proven for more than 100 years that generally, property price will only go up, especially when it is in a good location.

Is real property investment considered high risk or low risk? Some may say that it is low risk because property price will surely trend upwards in long term. Some may say that it is high risk because we may end up serving the huge loan interest for life if we made a bad decision.

For me, if you know nothing about it, never try or never learn, then it is high risk. If you learn it, understand it and become used to it, then it is low risk.

"Don't put all your eggs in a basket". This is quite true. We should spread the risk by investing in a few investment vehicles that we are comfortable with. If we can tolerate higher risk, then we can put a bigger portion of our assets in higher risk investment.

Whatever investment we choose, it should suit our risk appetite and financial position so that we won't have too many sleepless nights!

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