THE stock market has gone through a rough ride during the pandemic with many investors wondering, whether if the time is right to enter the stock market.
Before you make any decisions, do consider the following aspects of investing:
How much risk are you willing to take?
In Malaysia, all financial practitioners must now determine their clients’ “appetite for risk” and check what is their “capacity for loss” before making an investment recommendation for them.
In general, different people will have different risk appetite; depending on age, income level, degree of experience in the stock market and so on. These tests allow you to assess your individual risk levels and indicate your comfort zone towards investment.
How much financial knowledge do you have?
Understanding how much financial literacy you have is important as it will determine how much financial risk you would be willing to take, based on your understanding of the types of investment that you are about to undertake.
According to statistics, the risk-taking propensity is likely to increase with an increase in investors’ financial knowledge and experience.
However, having more financial knowledge than others does not mean that you will make right decisions when it comes to managing your money.
People are driven by sentiment and system, hence your financial behaviour play an important role in your overall financial outcomes. Therefore, we need to manage our investment risk through diversification and asset allocation to mitigate our risk.
What is your time horizon?
To create a portfolio based on time, you must realise that volatility is a bigger risk in short term than long term. If you have 30 years to reach a goal such as a retirement, a market move that causes the value of your investments to plunge is not as big a danger given that you have decades to recover.
Secondly, which stage of life cycle you are in is also equally important as different life stages will have differing commitment level in the family. For example, a couple with a new-born is going to have different requirements from a person nearing retirement.
In the case of a young couple compared to another in their late 30s who are welcoming a new addition to the family, who do you think will have the capacity to take on more risk?
Consider an appropriate mix of investments
By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can help protect against significant losses.
By investing in more than one asset category, you will reduce the risk of losing money while your portfolio’s overall investment returns will have a smoother ride.
If the returns of one’s asset category falls, he will be in a position to counteract his losses in that asset category with better investment returns from another asset category.
In addition, asset allocation is important because it has major impact on whether you will meet your financial goal.
If you do not include enough risk in your portfolio, your investments may not earn large enough returns to meet your future financial goals.
Pauline Yong, CFTe, CFP, is a certified member and licensed financial planner with Phillip Wealth Planners Sdn Bhd.
Article originally appeared in Focus Malaysia on 09/12/2021