From The Straits Times    |

Here’s the not-so-good news. If you’ve been parking your cash in a basic savings account, every dollar in there would be losing value because of inflation. The good news is that you can stretch your dollar – by investing. The longer your money sits in an investment account, the more money you’ll likely reap. Before you begin, make sure that your debts are under control. In case you suffer some financial setback, it’s wise to put aside an emergency fund of between three and six months’ worth of your living expenses. Good to go? Let’s see how you can make your money work harder for you.

 
Find the money to invest
An initial investment usually varies between $1,000 and $5,000, depending on the investment products you wish to invest in. The first question that pops in your head is probably: “Where am I going to get the money to start?” Try using the next bonus you get from work, or putting in some overtime to earn some spare cash.
 
If you can’t cough up $1,000 to start your portfolio, then draw up a plan to reach that goal, like putting aside $100 from your salary into an automatic savings account. The earlier you start investing, the more risks you can afford to take. Thanks to the power of compound interest – which means that the interest you earn each year increases – you can sit back and watch your money grow.
 
What’s your risk quotient?
When the stakes are high, do you get an adrenaline rush or do you get all sweaty and nervous? These physical tendencies during stressful situations can provide clues into what your risk appetite is like while investing. Take comfort knowing there are different products in the market to suit your risk level and needs. When it comes to building up your investment portfolio, there are also other factors to look at, like your age, ability to save, and family background and career status.
 
The general rule is that your risk levels should decrease as you grow older. So, by the time you’ve reached your twilight years, you should have reaped the benefits of an earlier start. Another important factor is how much you earn and save. If your pay packet just about covers some savings and the bare necessities, it would be foolish to adopt an aggressive approach. But if you’re debt-free, command a good salary and even have strong financial backing from your family, you can afford to take on more risk.
 
Building your first stock portfolio
With your risk quotient in mind, know what your goals are. For instance, are you saving for a house or a three-month long vacation in Europe? If you need money pronto, pick a product where you can cash out your investment quickly. Besides considering how fast you need the money, you should also consider the product’s risk level and the rate of return. The general rule is, the higher the potential return, the greater your risk of loss.
 
Even the most experienced investors may find it a challenge to identify the “right” investment opportunities. So if you haven’t got the time, inclination or resources to manage the portfolio yourself, turn to a financial advisor for help.
 

 
What to invest in
Now that you know what your risk quotient is, you can more or less pick the investment products which suit your needs best. Here’s a breakdown of several:
  • Unit trusts
Good for: This is the entry level for those who have just started investing and have low risk levels. Also for those who can afford to put money aside for five years because these are long-term investments.
Good because: Your investments are diversified and spread out according to the different types of funds you’ve put your money in.
  • Structured deposits
Good for: Newbies who can’t stomach risk and prefer a safety net.
Good because: These may have lower potential rates of return and offer more protection on the invested amount, but only if you cash out at, not before, maturity.
  • Bonds
Good for: Those who are risk-averse as well as beginners exploring investment opportunities.
Good because: Buying a bond is generally low in risk. It can be better than putting your money in a savings account because you’re likely to get higher returns.
  • Blue-chip stocks
Good for: Those looking to invest in stocks with an established track record.
Good because: These are usually household names and large companies. They can sometimes come at a hefty price, but are usually less risky than penny stocks.
  • Penny stocks
Good for: Seasoned investors with higher risk appetites.
Good because: You stand to profit big, but risk losing substantially as well. That’s because they tend to be less established and smaller companies whose earnings can be volatile and hard to predict.