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How do I Invest the 10k I Have Saved?
Savings are important, both for future expenditures as well as for emergencies. However, a lot of people don’t know where to put the money they saved. This is a thread on a simple rule of thumbs of how to manage your savings.
Savings are important, both for future expenditures as well as for emergencies. However, a lot of people don’t know where to put the money they saved. This is a thread on a simple rule of thumbs of how to manage your savings.
Here are the three general rules:
1. Diversify your baskets
2. Avoid buying individual stocks/Unit Trust on your own
3. Avoid trading
1. Diversify your baskets
2. Avoid buying individual stocks/Unit Trust on your own
3. Avoid trading
1. Diversify your baskets
You should divide your savings and put them into different places. You want to avoid risking all your money in just one place. By diversifying your portfolio, you spread the risk into different places and essentially reduce your overall risk.
You should divide your savings and put them into different places. You want to avoid risking all your money in just one place. By diversifying your portfolio, you spread the risk into different places and essentially reduce your overall risk.
There are many ways to diversify your portfolio, depending on your risk profile. For those who are more risk tolerant, you may want to invest higher percentage of your money in higher risk investments like stocks.
If you are more risk averse, you may want to invest in safer products like fixed income bonds or ASB. Below are some examples of different portfolios.
2. Avoid buying individual stocks/UTs on your own
According to many academic research, even the most sophisticated investors don’t have the ability to pick the right stocks. If one claims his investment never occurs loss before, it’s either he is super lucky or he’s lying.
According to many academic research, even the most sophisticated investors don’t have the ability to pick the right stocks. If one claims his investment never occurs loss before, it’s either he is super lucky or he’s lying.
Imagine there’s a room of 100 people, and you want to choose 1 person to represent you for a “Coin-Flip Competition” which the winner is determined by the most number of heads flipped. You give everyone a coin each and ask them to stand up.
Then, you ask them to flip their coins all at the same time. Those who get tails are told to sit. You repeat this until you’re left with one person. After about 7 flips, there is one person remain standing, named Fate. Here’s a question: Would you select Fate to represent you?
The answer is no, because you know that she flipped heads 7 times purely because of luck, and she doesn’t have any special ability in coin flipping. You know that whoever you pick to represent you doesn’t matter because coin flipping is a 50/50 chance.
This coin flip example explains the fundamental idea of stock picking. A guy who claims to never lose money in stocks is as likely to lose money in the future as other people, just like Fate who is as likely as anyone else to get tail on the next flip.
Picking stocks is like choosing 1 of the 100 people from the example and wish that you pick Fate. You don’t want to risk your hard-earned savings on luck, so you should avoid picking stocks on your own. This also applies to all investments in general like UT, etc.
3. Avoid Trading
People trade many things like stocks, gold, Unit Trust, etc. We often see these people post their profits on twitter/igstory and you start thinking: Should I learn how to trade and trade my money?
People trade many things like stocks, gold, Unit Trust, etc. We often see these people post their profits on twitter/igstory and you start thinking: Should I learn how to trade and trade my money?
Again, the answer is a big NO. Many evidences show that in a long term, if you are a trader and you breakeven (means don’t lose nor make any profit), you are performing better than 99% of all traders. Making money from trading depends heavily on luck.
Investments like stocks/gold are made for the long term, and the right strategy to profit from them is by buying and holding those assets. You invest your money at places so that your money can act as financial capitals to create additional value for you to reap the benefit.
Trading on the other hand is short term and a ZERO-SUM game. Zero sum means that if you profit, it’s because other people lose. When you profit by buying low & selling high, there’ll be other people who are buying high and selling low. You are profiting at the expense of others.
The 1% profit from the other 99%. There is no value created when you trade because you keep buying and selling assets. You are profiting by speculating the price movement of the assets and this is fundamentally the same as playing Russian Roulette in Vegas, i.e. gambling.
CONCLUSION
It takes deep financial management knowledge to secure your savings in the right places. However, these 3 simple rules can help you avoid making wrong decisions in planning your financial future. Seek for advice from the right people and make decisions accordingly.
It takes deep financial management knowledge to secure your savings in the right places. However, these 3 simple rules can help you avoid making wrong decisions in planning your financial future. Seek for advice from the right people and make decisions accordingly.