IT’S no secret that savings and investments should form part of a healthy financial plan. As economic shifts, technological advancements, and new government initiatives come on board, Malaysia is witnessing a growing interest in retail investment.
Invest-to-save, where money is put towards an investment instrument with the objective of building a nest egg, can be an effective financial planning strategy. Among the investment instruments available in Malaysia, securities are often part of an invest-to-save strategy as it offers good potential to grow an initial or principal investment amount.
However, unlike savings, investments such as securities entail risks and must be carefully conducted with sound knowledge, discipline and good habits. Here are three ways new investors can develop the right traits to meet their objectives, obtain long-term value and find success when investing in securities.
Understand time horizons
Generally, businesses use securities as a means to raise capital for various purposes such as to fund business activities, launch new products or for business expansion. The most common type of securities are shares which are tradable financial assets that represent a share or ownership of a company.
Investing in well-managed companies that have strong financials and a competitive advantage in the market such as companies that are well-established with a strong market share or possess proprietary technology, can offer good potential for capital appreciation over the mid- and long-term. This begins with a strong foundation – a well-structured portfolio powered by an informed investment strategy.
To build an investment portfolio, start by realistically determining when the money would be required, and determine your risk appetite. As stock prices fluctuate with market, industry, and economic changes, ensure there are periods for growth when conditions are favorable and time for recovery when prices drop. As a rule of thumb, if there is less time available until the point you expect to use the money, take less risk.
Take informed, well-calculated risks
No investment opportunity is completely risk-free, and it is imperative for investors to understand what these risks are, how they can evolve and how to balance these against personal goals and potential returns. Investors who deep dive into understanding the risks they are comfortable with at the start of their investment journey, and strategically consider calculated risks against the rewards they are looking to gain will find more meaningful success in the longer term.
From the onset, be clear, honest and firm about your risk tolerance level. Determine and write down how much money you can realistically bear to lose in the event things don’t go as planned. Before attempting to buy stocks or shares, learn about the company, its past and current performance, as well as its risks and potential rewards.
Study aspects such as revenue growth, profit margins, debt levels and cash flow to learn if the company can weather economic downturns and continue to grow over time. Look at consistent earnings growth, the frequency of dividends, and payouts in the context of industry trends and the company’s market potential.
Investors with a lower risk tolerance should also consider more defensive portfolios, while growth or speculative portfolios may be better suited for more ambitious investors with higher risk tolerances.
Build diversity
As the saying goes, don’t put all your eggs in one basket. This certainly rings true when it comes to investing, and securities is one way to build more diversity into investors’ overall financial plans.
On Bursa Malaysia Securities, the main categories of securities include shares, warrants, exchange-traded funds (ETFs) and real estate investment trusts (REITs). This plethora of investment instruments offers investors the ability to spread risk through the acquisition of different types of shares or tradeable financial assets in various industries.
A good way to build diversity into your portfolio is to constantly consider and spread the risk across different asset types to ensure there is no overdependence on one sector, industry or asset class. Depending on risk tolerance levels, consider a split portfolio with a percentage allocated appropriately to growth, speculative and defensive stocks. Visualise your portfolio diversity by creating a list of current and planned stocks and analyse the investment spread and risk across types of companies, sectors and regions.
When analysing and executing your portfolio, steer clear of emotional investing and behaviours that can cloud judgement. This includes “anchoring” on previous stock performance, panic selling shares driven by fear, or confirmation bias – overlooking negative information in the hopes that a stock would recover.
Self-directed trading platforms are an accessible and affordable way to get started on your investing journey. Apart from offering competitive fees and commissions, and the ability to start investing with a small amount, these platforms also have handy tools such as paper trading that allow investors to test portfolios, practice strategies, and hone emotional control in a simulated real-life situation using virtual cash.
When exploring self-directed trading platforms, look for trusted, secure, and reliable platforms that are licensed by the Securities Commission Malaysia, that are intuitive and easy to use and have good user ratings. Consider aspects such as accessibility to products and markets that meet investment goals, platform language, as well as a rich resource of educational material, trade information and analytics that can help even new investors make informed decisions.
THIS article is contributed by Webull Malaysia CEO Kenneth Chan.
