This article is written in collaboration with dollarDEX. All views expressed are the independent opinion of DollarsAndSense.sg
As the prices of goods and services continue to increase due to inflation, leaving our money in a regular savings account which earns us only 0.05% in interest per annum just isn’t good enough. Not only will our savings earn us barely any money from the interest, our spending power will be eroded over the years as inflation will outpace the interest we earn in these bank accounts.
This is why it is crucial for us to invest our hard-earned money, not just to preserve our wealth against inflation, but also to continuously grow our pot of wealth over time.
While it’s important to start investing as early as possible, there are also some factors we first need to understand before we start investing our first dollar. These factors will help us to get a better understanding of our investment style, purpose and ultimately the type of investment decisions that we make.
#1 Your Current Financial Situation
Before you start investing, you first need to understand your own financial situation.
Do you have any debts to clear? As you embark on your investing journey, one of your early goals should be to clear any outstanding debt. Be sure to pay off the loans that incurs high interest. Credit cards are an example of bad debt that charge you high interest rates. The sooner you pay off your debts, the lesser you pay in interest.
On the flipside, there are types of loans that we take up such as housing loans and education loans that charge relatively low interest rates. In these situations, investing the excess cash that you have makes financial sense if you are able to earn higher investment returns as compared to the interest rate that you are incurring for your loans.
For example, if your investment yields 5% per annum while your loan interest is 2% per annum, you are still earning an investment return of 3% per annum. Hence, investing while you have these low-interest loans to pay can help you to come out of debt faster while accumulating your wealth.
Do you have enough savings in your emergency fund? Your first steps into investing should not involve emptying your bank account. Good financial planning includes having an emergency fund that will be able to tide you and your family through six to nine months of unemployment.
There are a few ways for you to store your emergency funds. The key is to ensure that your emergency funds is in an accessible and highly liquid investment instrument that allows you to withdraw your funds quickly in times of need and at the same time, earn you a reasonable interest. You can hold these funds in liquid investments such as Singapore Savings Bonds and Money Market Funds (MMF) or in a high interest savings account.
Do you need these funds for big-ticket purchases? If you have a big-ticket purchase coming up, such as a wedding or your home renovation, the sum of money you intend to invest should be set aside for these expenses. It would be wise to keep this money in a high-interest savings account or an investment that protects your capital and still gives you decent interest, such as the Singapore Savings Bonds or Money Market Funds (MMF).
MMFs refer to mutual funds that invest in short-term and low-risk debt securities. Commonly compared alongside fixed deposits, MMFs provide investors with a vehicle to preserve their wealth while ensuring high liquidity and low-risk. This could be a great way for you to grow your savings which is sitting idly in your bank account, waiting for the big-ticket item to come along.
#2 Your Investment Horizon
When you invest from a younger age, time is on your side. The investment horizon of a 25-year-old that is just starting out in the workforce looks vastly different from a 50-year-old who is just beginning to invest for his retirement.
Make the power of compounding work for you. When you start at a younger age, you have more time in the market to ride out volatility and stay vested. Your investments have more time to compound itself and you will receive higher returns over the years as compared to an older investor.
At a younger age, you are also likely to have fewer financial commitments. This means that you can channel a higher percentage of your salary towards investing. As you get older, even as your salary increases, you may find yourself saddled with more financial responsibilities that increase your expenses significantly, making it difficult to invest more at an older age.
#3 Your Investment Goals
Your investment goals will shape the kind of investments you take on. These goals can be categorized into short, medium and long-term goals. A few common investing goals include wealth preservation, wealth accumulation, financial independence, paying for your child’s education and building a nest egg for your retirement.
To help you plan for your retirement, dollarDEX has a retirement calculator to help you find out how much money you may need to retire based on your lifestyle needs. All you need to do is to input a range of factors such as the age you want to retire at, your current portfolio value, your monthly investment as well as the estimated annual returns. This provides you a quick overview of your portfolio size at the point of retirement as well as how much your retirement income will be in today’s value.
#4 Your Risk Profile
Your risk profile is dependent on two main components, your risk appetite as well as your time horizon (i.e. your ability to take on risk).
If you want higher returns, you have to be prepared to take on more risks. Understanding your risk appetite will help you to narrow down the types of investment instruments you should be looking at. Your risk appetite will also affect the asset allocation within your investment portfolio.
For example, a conservative investor who is risk-averse may prefer to have a portfolio that is heavy in bonds. For an investor who is willing to take on more risk in exchange for higher returns, a portfolio heavy in equity could be of choice.
dollarDEX offers all investors a free risk assessment after you open an account. You will discover your investor profile, whether it is: Conservative, Moderate, Balanced, Growth or Aggressive. This risk profile depends on your inputs to the questions which seek to determine your risk appetite and time horizon.
After your risk profile has been determined, dollarDEX will recommend an investment portfolio that suits you. This includes your asset allocation as well as the different funds that make up your proposed portfolio. Here is how the dollarDEX Balanced model portfolio currently looks like:
This recommended portfolio also breaks down the specific percentage that will be invested in each fund. From there, you can dive deeper into each specific fund and read up on the fund performance and fund factsheet.
#5 Your Opportunity Cost
What is your opportunity cost of not investing?
If your money is kept in a high interest savings account that gives you a decent interest rate of about 2% per annum, your opportunity cost is lower compared to someone who is keeping their money in a bank account earning just 0.05% interest per annum. This means that you can afford more time to weigh your investment options before deploying your funds into an investment.
For those that are holding your money in a bank account earning a meagre interest rate of 0.05% per annum, your opportunity cost of not investing will be higher. Not only is the money in that account not growing your wealth, you are also missing out on potential market returns.
What is important is not timing the market, but rather time in the market. Rather than stalling on your investments, you should start investing as early as possible.
Making The Best Investment Decision For Yourself
Once you have taken these factors into consideration, you will better understand yourself as an investor and be more prepared to get started on your investment journey.
Unit trusts are one of many investment vehicles investors can consider to invest in. dollarDEX, established in 1999, is one of the first online platform in Singapore, that allows investors to easily access unit trusts. One concern some investors have when it comes to investing in unit trusts is the fees charged. dollarDEX does not charge investors additional fees for their investments, this means no platform fees, switching fees and sales charges. Your money is fully invested.
dollarDEX also helps you to narrow down your investment options by recommending an investment portfolio that suits your risk profile. You can also use dollarDEX’s fund finder to search for a fund based on your preferences. Find out more about investing with dollarDEX here.