Many textbooks have defined investing as the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. Indeed, so much emphasis has been placed on investment returns such that the other aspect of it is often forgotten.
Watch this video as Evelyn Goh, Deputy CEO & Chief Advisory Officer at Providend, shares the other important aspect of investment that many often neglect and advise what investors should focus on.
1. What Is An Important Aspect That Investors Often Neglect?
When people think about investment, the first thing they think about is “what kind of returns can I get”. But really, what they should also be thinking about is “what level of risk can I take”. Risk means that there is a chance that you can lose some or even all of your investment amount. And there is a trade-off between risks and returns.
Low level of risks are associated with low potential returns and high level of risks are associated with high potential returns.
There are essentially two types of risks- Company Specific Risk and Market Risk. Company-Specific Risk, as the name implies, are risks associated with the company and the industry that you are investing in. And this type of risks can be easily reduced through diversification.
Market Risk, on the other hand, are risks associated with investing in the markets. And market risks include things like economic risks, political risks, interest rate risks, and currency risks and such risks are inherent in investments and are unavoidable.
2. How Does Providend Deal With These Risks?
We deal with risks in three ways:
Firstly, through diversification. Instead of concentrating your investments in only a few stocks, we advocate spreading them across many different companies. And by so doing, you reduce the Company Specific Risk greatly. One of the most effective ways of doing so is via a unit trust, where you can invest in thousands of companies using a relatively small amount of capital.
Secondly, we use strategic asset allocation which is essentially the spreading your resources across different asset classes such as equities and bonds. In this way, the gains in one asset class can reduce the impact of losses in another asset class, thus reducing the overall risk of your portfolio.
And finally, we do regular rebalancing. Asset values move differently and thus your original allocation will have changed over time. Rebalancing allows us to sell what has gone up to buy what has gone down and thus bringing your allocation to the original allocation and thus maintaining your portfolio at the risk that you are comfortable with.
3. As An Investor, What Should You Focus On?
Do not focus only on returns. But instead, ask yourself what is it that you are trying to achieve. To what end is your investment supposed to bring you to? Because we believe that investments should be a mean to an end and not an end by itself.
We advocate that you do your comprehensive financial planning to find out really what are your objectives that you are trying to achieve. And by so doing, you will be able to understand and know what is your need to take risks, your ability to take risks and your willingness to take risks.
Seek help, talk to a trusted and competent adviser whose interests are aligned with yours, who would be able to assist you to find an asset allocation that is suitable for you, so that you can sleep peacefully at night regardless of what direction the markets are heading.
As a licensed financial adviser and a registered fund management company with Monetary Authority of Singapore (MAS), we can design a portfolio that is suitable for your risk profile to help you achieve your financial goals.
For more related resources, check out:
1. Stocks Can Be Less Risky Than Bonds
2. How To Get Passive Income From Your Accumulating Funds
3. Active vs Passive vs Evidence-Based Investing
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.