There’s another advantage in starting early. If you start early you have a longer time horizon, you are able to take on more risk, accept more volatility, able therefore to invest in higher risk, higher return assets.
At the same time, one shouldn’t avoid risk altogether. Because if you do, if you don’t want to take risk, then you’re not going to have returns.
Time is VERY important. The amount of time that you have to meet your investment objective is a major determinant of how much risk you can take & therefore how much of your portfolio you can put into risky but higher return assets.
Diversification can take a number of different forms. You can diversify through asset classes, so you have a mix of equities, bonds, property & cash. And you can diversify within asset classes.
Asset classes tend to move & react differently to economic environment. For example, in a recession, stock markets might do poorly, or even property market. But bonds do well. So if you have a portfolio that’s well spread out across equities property & bonds, you are protected.
Get a statement from your financial advisor as to what are the charges levied on the investor. There are various costs & fees. A one time charge, called the front-end fee, can be up to 5%. The annual management fee can vary between 1 to 2.5% a year. There are also switching costs which can be up to 1%.
The prospectus will explain management charges & the other major charges such as trustee fee & audit cost. The annual & semi-annual report will show the total cost every 6 months.
If you can, remove the emotion & sentiment from investing. One way is to have a regular savings plan so it doesn’t matter if markets rise or fall, as you’re going to be putting in regular amounts of money.
History shows that most investors are really unable to time the market, to know when to get out & when to get in. And the most successful proven strategy is to stay regularly invested over a period of time.
It’s important that every investor spends sometime to review their asset allocation decisions every year. You need to consider whether you family circumstances have changed. For instance, if you just got married, your asset allocation should change to reflect this.
In a typical top-down approach, you shape your investment first by forecasting the economy & then choosing the sector & a company. Changes in the economic conditions are very important. Shifting the proportion of your investments say from equities to bonds or into more cash so your portfolio can withstand a recession.
Successful investors try to fight this herd instinct. They try to think independently & act independently. Among the most successful investors this century are independent thinkers.
The buy low, sell high principle which is probably the most important investment rule. In order to buy low, sell high, investors should buy in times of crisis or despair & then sell in times of exuberance.
Use common sense. Investment professionals often use common sense to make judgments.
