The best way to grow money is through investing. Today I am going to show you in 5 steps how to do it.
1. Define your financial objectives and investment time frame.
Investing without goals is like playing football without goalposts. It’s pointless.
Your investment goal must also be quantifiable. “Make more money” is not a quantifiable goal. “Make $250,000 by the time I’m 65” is.
One way is to talk to a financial advisor.
Another way is to work out your desired Income Replacement Rate IRR. This is the percentage of your current income that you want to have, upon retirement. A comfortable retirement usually requires an IRR of 60 to 70 per cent, although those who live simply may aim for just 50 per cent, and some ambitious people may even aim for 110 per cent.
For example, say you earn $3,500 per month. To get an IRR of 70 per cent, you need to make $2,450 per month after retirement.
Assuming you retire at age 65, and plan to live till 90, you will need roughly $2,450 per month for 25 years. Now you know you’re looking at a minimum of $735,000, to retire comfortably.
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2. Understand your risk appetite and choose investments that match it.
Speak to a financial advisor to get a risk profile assessment. This will determine the overall level of risk you can afford to take.
Once you know your risk profile, you can start to match your assets accordingly. For example, if you are a risk-averse investor, you may want to invest in assets that are less volatile, such as bonds. If you are a more aggressive investor, you may want to invest in assets that have the potential for higher returns, such as stocks.
3. Learn about the different investment options available.
While there are endless investment options available, let us look at three today, Equites, bonds and unit trust funds.
- Equities are ownership shares in a company. They are also called stocks. When you buy an equity, you are essentially buying a piece of the company. The value of your equity will go up and down depending on how well the company does. Some stocks also pay out dividends.
- Bonds are loans that you make to a company or government. When you buy a bond, you are essentially lending money to the company or government. The company or government promises to pay you back the money, plus interest, over a certain period of time. Bonds are generally considered to be safer than stocks because they are a form of debt, which means that the issuer is legally obligated to pay back the principal and interest. Stocks, on the other hand, are not debt instruments, so there is no guarantee that the company will pay dividends. However, it is important to note that bonds are not without risk. The issuer of a bond could default on its payments, which would result in a loss for the bondholder. Additionally, bonds tend to underperform stocks in the long run, so investors who are looking for growth should consider investing in stocks instead.
- Unit trust funds or mutual funds are a type of investment fund that pools money from many investors and invests it in a variety of assets, such as stocks, bonds, and cash. The fund is managed by a professional investment manager, who is responsible for selecting the assets and managing the fund’s risk. A fund’s performance is typically measured against a benchmark index. For example, if the benchmark index delivers a return of 3.76%, then a unit trust that delivers a return of 3.86% has outperformed the market. Conversely, if the unit trust’s return is below the benchmark index, then it has underperformed. It is important to note that fund performance should be evaluated over a 10- to 15-year period, not just a single year. This is because the market can fluctuate wildly in the short term, and it is important to get a sense of how the fund has performed over a longer period of time.
Remember that when you invest, avoid putting all your investments in one type of asset; don’t buy nothing but stocks, for example, or have nothing but bonds.
4. Evaluate your portfolio’s performance against your financial goals. Remember step 1, when you worked out how much you need? Next, you need to estimate how much your portfolio will grow over time. Let’s assume you invest in a diversified portfolio with an expected annual return of 5%. If you contribute $1,000 per month for the next 30 years, your portfolio will be worth approximately $834,660.
This is more than enough to meet your target of $735,000 as we calculated in step 1, so you’re on track to reach your financial goals. However, if your projected sum falls short of your target, you may need to adjust your investment strategy. For example, you could lower your expected Income Replacement Rate or increase your monthly contribution for investment.
5. Review your portfolio and make adjustments as needed. Building a portfolio is an ongoing process. You need to regularly review your portfolio and make adjustments as needed. For example, if your equities appreciate and make up a larger part of your portfolio than expected, you may need to sell some of them to maintain a balanced asset allocation.
As you get older, you will also need to adjust your asset allocation. For example, if you are nearing retirement, you may need to shift your focus from growth to preservation. This means increasing your allocation to fixed income and cash and decreasing your allocation to equities.
It is important to work with a financial advisor to help you build and manage your portfolio. An advisor can help you understand your risk tolerance and investment goals, and they can tailor a portfolio to your specific needs.
Your role is to have a clear understanding of your goals and to monitor your portfolio regularly to ensure that it is on track to meet those goals.
I hope this video helps you in being one step closer to your financial goals.
Reference: https://www.dbs.com/livemore/money/investing-101-step-by-step-guide-to-growing-money.html
