Ready to start investing? Here are 3 things first-time investors must know

Having gone through lots of books and attended many conferences on personal finance, there is one piece of advice that has stayed with me and helped me grow my money, and that is investing.

Several money experts agree that the one thing that makes the rich different from the not-so-rich is that the former invests their money, while the latter just saves it.

Decades ago, investing would require a significant amount of cash. I remember a bank executive in a media interview said that to start investing, one would need at least P1 million in funds that they can afford to set aside and even potentially lose. My savings at that time was nowhere near that amount, and I remember thinking that if it does get to that figure, would I ever be able to say comfortably that I don’t mind losing it when I invest?

Thankfully, today’s investing landscape is very different. Depending on the type of investment, you can start with as little as P1,000, or P5,000, or P10,000. There are also more products to choose from, and you can invest not just with traditional banks but even with digital banks, insurance companies and government-run institutions.

But whether it’s P1,000 or P1 million, that’s your hard earned money so take these three steps to make sure you are doing it right and investing smart.

#1 Know your financial life stage

Start with online questionnaires and if possible, sit down for a free financial check-up with financial institutions. There are at least 3 things you need to know about yourself as an investor: (1) your financial life stage; (2) your investment horizon; and (3) your risk appetite.

Your financial stage can help you quickly see how much risk you can take. Are you young or middle-aged or nearing retirement? How much financial burden do you have? Your age can help you decide how much time you can afford to stay invested and ride out market volatility. Your financial burden can tell you if you can afford to lose some, half or all of your investments.

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#2 Set your investment horizon

Investment horizon can be short, medium or long-term. Decide how long you can stay invested - less than 1 year, or up to 3 years, up to 5 years, up to 8 years, or even longer. Usually, the older you are, the shorter the time horizon, and the reverse is true for younger investors. But you can also be a young investor with a short horizon and an older investor with a long horizon.

In the end, you decide how long you can afford not to touch your investment. If it’s surplus money, good for you as you can invest it and watch it grow over time.

#3 Discover your risk appetite

It’s possible to wake up the next morning and find out that your money is “gone”. Those who invest in the stock market and experienced a bull market and a crash can confirm this sad and unfortunate fact. The upside is if you wait it out, the market might recover (and along with it, your portfolio).

Here are four risk appetites you can choose from: (1) Capital preservation, where you want to keep losses at a minimum, but likely you will also have little returns; (2) Income orientation, where you want to earn a little income and at least beat inflation; (3) Income and growth, where you want to achieve returns both from your capital appreciation and interest income; and (4) Aggressive growth, where you are willing to consider high-risk financial investments for maximum returns.

Personally, on my early days as investor, my risk appetite was Capital preservation but then I got frustrated with so little returns. Overnight, I jumped to Income and growth and as I learned more about the markets and products, I became an Aggressive growth investor. There are no right or wrong answers here, only what’s right for you.

If it’s too good to be true, it likely is

Final word of caution – when you start looking for investments, you will be tempted with many offers. The more tempting it is, the more cautious you should be. Do not simply rely on recommendations of friends, even family, especially when it’s a pyramid scheme where they earn from referrals. You should trust advice that is not tied to anyone’s personal profit. Do your homework before handing over your money. Google companies, their track records and check with government agencies if their registration papers are in order. In today’s information-rich society, it’s easy enough to discover scams if you keep looking.

ABOUT THE AUTHOR
Aneth Ng-Lim returns to writing after more than two decades of working as a communications specialist in the government and the private sector. Her advocacy for financial inclusion and personal finance began when she served as head for Consumer Education during her stint at a multinational bank.

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