Wednesday, April 18, 2007

Golden rules of investing - from BT

Golden rules of investing

DANIEL BUENAS advises investors not to forget that there is a creed they should live by

PAY, salaries and jobs - these have been perhaps the hottest topics of discussion in recent weeks.

Every other day we read articles and hear stories of how much some fresh graduate is earning at his new job as investment banker, or how our aunt or uncle made a killing on that high-end property he or she flipped.

And with the stock market soaring to new peaks, some of us must surely be feeling a little left behind as others all around seem to be making money as if gold were falling from the sky. Amidst all this, perhaps now will be a good time to review some of investing's golden rules, as well as to put some perspective to things.

The first thing that any investor should do is to develop an investment plan and strategy. However, while that may be the technical or 'hardware' side of things, one area that many investors forget to nurture is the 'heartware' of investing.

What do I mean by that? Sure, we all need a strategy to investing, but I think every person in general - and an investor specifically - should have a code, or creed, that he or she should subscribe to and live by.

There are no hard and fast rules, but here are some things that you might want to think about:

It's not about the money - really!

Let's be honest - in a society as materialistic as ours, money has become enshrined in our national psyche. This is not uncommon throughout the world, but one must understand that making more money is not a goal in and of itself. Sure, we choose to invest in order to grow our assets and income, but let's not forget that more cash is a conduit to a better life - for ourselves and our family. So if your pursuit for money means sacrificing your relationships, your health or the quality of life, then perhaps you should re-evaluate your circumstances.

And don't think more money will solve all your problems. Assuming you have no prior debt or other obligations, if you can't live within your means on your current salary, it is likely that even if you start to earn more, you will still have problems making ends meet. It is often those with the highest income who fall into the deepest debt.

Money is not just money

An addenda to the above point is that your money is more than a figure in your bank account - it is a tool, a living breathing creature that can be nurtured, grown and put to work. Accumulating more wealth is great, but knowing what to do with it is equally important. This ties in with why it's important to control your spending now, and not later. The effect of compounding means saving $1 today for investment is vastly different from saving $1 five years from now.

Recently, I spoke to a friend who, having just graduated, is already planning to buy a car. With a monthly income of just $2,500, and coming from a relatively humble family, I asked her why she would want to devote such a large part of her income to financing a depreciating asset.

'Why not?' she quipped back. 'I can afford it.'

Well, couple such an attitude with the ready abundance of credit cards and credit facilities - and given the Singaporean proclivity for expensive habits like travelling, buying branded goods, and holding overly lavish weddings - it is no wonder that many young working adults are mirred in debt by their early 30s.

You are in charge of your life - so take charge of it. Now.

OK, this sounds really trite and preachy, but it is true. Unhappy that someone seems to be making more money than you? Then do something about it. It's your life after all! Don't be afraid to fail, and don't let your circumstances hold you back.

Think you should start investing? Good for you. Everybody, should invest - wisely, I may add - so go ahead and do it.

But don't keep saying you want to invest, and never do anything about it. Empower yourself by doing some research, asking for advice (from some one qualified to give it), and then starting to invest. The sooner you start, the better. Just think of it this way: the longer you wait, the less time your money will have to grow, and the lower the long-term rewards.

Don't learn from your family if they're bad examples

This may be harsh, but it is true. Is your family mirred in debt, or making just enough to make ends meet? Figure out why this is the case. Sometimes, it is a matter of circumstance. But it could also be because of poor money management. And while job income does play a part, it is important to note that investing is not just a rich man's game - unless you are in the lowest income brackets, it is possible to save enough to invest on a regular basis.

When it comes to saving for investment, pay yourself first

It's a simple concept really. When you get your first pay cheque, decide how much you can realistically save in liquid assets and for investment. Take into account your monthly liabilities, and see what that adds up to.

For example, you may decide to save 15 per cent of your pay in cash to build up a reserve (most financial advisers recommend six-months in liquid assets), 35 per cent for investment (split into 10 per cent low-risk, 10 per cent medium-risk, and 15 per cent high risk).

The remaining 50 per cent can be used to pay bills and other obligations, as well as for general spending. In that way, you assure your future, instead of squandering it in the present.

In the end, investing is more than just making money. The more philosophically inclined would even say it mirrors the way a person handles life. To succeed, it takes discipline, risk-management and prudent judgement, but there are many rewards to investing carefully and early-on in life. Just don't forget what's really important, and the reasons behind growing your wealth.