1 Savings versus Investments
Squirrelling away money isn’t going to build you a retirement fund: You need to make sure your money grows at a rate equal or higher than inflation. “Saving involves not spending current income, while investing requires you to take those savings and do something with them to earn a return,” according to Investorguide.com. Recognising the difference will let your savings work much harder for you.
2 Diversify to Survive
Just as a well-balanced diet keeps you healthy, a balanced and diversified portfolio is essential for your financial well-being. Akin to not putting all your eggs in one basket, the portfolio diversification theory dictates that you spread your investments among asset classes such as stocks, mutual funds, bonds, cash, industries and even geography so that you reduce your risk. Ultimately, diversification aims to maximise returns by investing in different areas that would each react differently to the same event, meaning, returns have a low correlation. Most investment professionals agree that while it doesn’t totally protect you against losses, diversification is the most important component in fufilling your long-term financial goals while minimising your exposure to risk.
3 Time is on your Side
That line that momma has been selling you since your first heartbreak? It’s stock market-friendly too. Despite their short-term fluctuations, history bears that markets will rise in the long run, and investors have more to gain by sticking to their guns than panic-selling. Popularly cited proof of this is a study on investor behaviour by US Research Group Dalbar, which revealed from 1985 - 2006, the Standard & Poor’s 500 Index returned 11.9 per cent annually, whereas the average equity investor made only 3.9 per cent. By failing to time the market correctly (selling when the market is falling and buying in hopes of making a quick buck when the market is rising), these investors reduced their returns. So instead of thinking of cutting losses every time the market heads south, take a chill pill and let time work its magic.
4 Protect more than your Money
You’ve taken pains to spread your risk to protect your investments. But what about yourself? It’s vital that you protect your most important asset – your health – as your ability to work and draw an income is key to achieving your financial goals. Other than life insurance, the trifecta of insurance must-have includes: health insurance, critical illness coverage and disability insurance. A serious accident or illness doesn’t just saddle you with hefty healthcare bills that may eat into your current level of savings and investments. If it’s dire enough to render you unable to work, you will also not be able to earn an income, which further impairs your ability to save and invest in future.
5 Time is your Best Friend
Your parents would most likely have left out the mathematics when they were nagging you to save while you were growing up. Instead of spouting phrases like “saving is a good habit” and “you need to save for a rainy day”, what they really should have told you was: A mere $1,000 at a 10 per cent return a year will magically turn into $17,000 in 30 years! When it comes to investing, starting early makes all the difference. The magic lies in compounding – where earnings are generated from previous earnings. And the earlier you start saving for the future, the less you need to set aside to accumulate the same amount of wealth compared to someone who starts later.
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