11 Things to Consider Before Investing

Making investment decisions is a significant step towards securing your financial future and achieving your long-term goals.

Here are tips to consider before you start to invest:

1. Risk Tolerance

Assess your risk tolerance level before investing. It is important to understand that all investments come with some risk. Therefore, make sure to align your investment choices with your comfort level. You should consider your age, financial goals, and time horizon.

Low-Risk Investments

These investments are characterized by stability and safety, primarily focusing on preserving capital rather than generating significant returns. They suit investors prioritizing safety, with short-term financial goals or low-risk tolerance. An example of a low-risk investment is ASB (Amanah Saham Bumiputera), which provides consistent dividends and capital preservation over the long term, making it an attractive choice for conservative investors seeking stable returns.

Medium-Risk Investments

These investments balance potential returns and risk, making them suitable for investors with moderate risk tolerance and longer investment horizons. They may provide higher returns than low-risk investments but come with higher vulnerability. Examples of medium-risk investments include financial funds that offer a variety of investment assets, such as unit trust funds and bonds. They provide internal diversification and professional management, making them suitable for investors seeking exposure to various asset classes.

High-Risk Investments

A high-risk investment has the potential for significant returns but also carries higher levels of risk and volatility. It is suitable for investors with a high-risk tolerance and long investment horizons. Examples of high-risk investments include cryptocurrencies like Bitcoin, Ethereum, and Litecoin, which operate on blockchain technology and have gained popularity as speculative investments. They are highly volatile and lack regulation by traditional financial market authorities.

Are you willing to lose money to achieve high returns or not? If your answer is yes, you fall into the high-risk category. This means you are prepared to take on high risks to achieve higher investment returns. High risk typically involves the potential for significant losses but also the opportunity for greater returns. This investment strategy is suitable for individuals with the ability and willingness to bear high investment risks. Conversely, individuals uncomfortable with significant losses may prefer lower-risk investment options, albeit offering lower returns.

2. Financial Goals

Clearly define your financial objectives before making investment decisions. Are you investing for retirement, buying a house, or funding your children's education? Understanding your goals can help you better determine the most suitable investment strategies. Therefore, outlining your goals is the first step in investing, no matter how much money you have. Once you understand your goals, you can decide how much time and how much you need to invest to achieve them.

3. Time Horizon

Determine your investment time horizon, which refers to when you plan to hold an investment before needing the funds. Short-term goals, such as saving for a new car, may require more conservative investments, while long-term goals can tolerate more volatility. Examples of long-term goals are retirement planning or funding a child's education, which may benefit from investments with higher growth potential.

This is because the more time that passes before you need to convert your investment to cash, the more volatility and risk you can tolerate, as you have more time to recover from any market downturns that can happen along the way.

4. Diversification

To reduce risk, spread your investments across different asset classes, sectors, and geographical regions. Diversification means you include a variety of investments in your portfolio, which can reduce the adverse effects of the market ups and downs on your overall investment performance.

However, you must first build your emergency fund before embarking on investments.

An emergency fund is important as it will provide you with a financial safety net, providing a buffer against income disruptions or unexpected expenses, such as medical emergencies, job loss, or significant repairs. Usually, financial experts recommend setting aside money that will be enough to cover at least three to six months' living expenses in your emergency fund.

Once you have set up your emergency fund, you can allocate the remaining money into an investment based on your risk tolerance, investment goals, and preferred time horizon.

For those new to investing, a common approach to asset allocation may involve diversifying across different risk levels to manage risk while potentially achieving growth.

For example, allocate 50% of your investment portfolio to low-risk options such as savings accounts, money market funds, or bonds. These investments offer stability and lower volatility, making them suitable for short-term capital preservation.

Next, you could allocate 30% of your portfolio to medium-risk investments, such as diversified mutual funds. These investments offer moderate growth potential while still providing some level of stability.

Finally, you may allocate the remaining 20% of your portfolio to high-risk investments, such as individual stocks or speculative ventures. These investments carry a higher potential for returns but come with increased volatility and the possibility of significant losses.

5. Market Research

Conduct thorough research on potential investment opportunities. Analyze market trends, economic indicators, company fundamentals, and industry outlooks before making investment decisions.

For example, there's a lot of hype about the cryptocurrency Bitcoin right now. However, don't invest because you are merely following a trend. Understand the risk involved and avoid investing your money in speculative assets you can't afford to lose.

6. Costs and Fees

Consider the costs associated with investing, such as brokerage fees, commissions, and management expenses. Make sure you understand all of the fees involved in your investment option. Minimizing fees can enhance your investment returns over time.

For example, private mandate investments typically incur higher fees than other investment options like unit trusts. These fees include:

• Management Fee: Charged each time funds are invested, ranging from 3% to 5%.

•Annual Fee: Levied annually, typically between 1% to 2%.

•Investment Performance Fee: Charged annually, usually between 10% to 20%, subject to specific terms and conditions.

It's important to note that the fees will vary among fund management companies, and investors should know that investment profits are net of these fees. Therefore, thorough research is essential to select the best private mandate provider.

7. Liquidity Needs

Assess your liquidity needs and ensure sufficient cash reserves for emergencies and short-term expenses. Avoid tying up all your funds in an investment that may be challenging to sell quickly.

8. Legality of the instruments

Before investing in any financial instrument, it's crucial to assess its legality and understand the risks and returns associated with it and the entity managing it. Don't just focus on high returns, as excessively high returns may indicate potential scams.

Important things for you to consider before you decide to invest is to ask questions such as:

• What is this investment?

• How does it work?

• Who is behind it?

• How easy or difficult is taking out your money if necessary?

These are essential information to help you make informed investment decisions. With numerous get-rich-quick schemes offered in various forms, it's imperative to exercise caution and only invest in instruments approved by the central bank. To avoid falling victim to investment scams, you can check the financial consumer alert list by Bank Negara Malaysia.

Additionally, it's essential to understand liquidity. Liquidity is how easy it is to convert assets into cash without affecting market price.

For example, investment in ASB (Amanah Saham Nasional Berhad) has high liquidity as it is easy to begin investing, and investors can also easily access their money when needed.

Examples of low-liquidity assets include real estate properties. This includes residential homes, commercial buildings, and land, which often have low liquidity due to the time-consuming nature of buying and selling transactions. Additionally, the current market conditions and location of the property can influence the speed at which properties are sold.

Understanding liquidity is essential for investors to make informed decisions about their investment portfolios. Assets with high liquidity provide flexibility and easy access to cash. In contrast, assets with low liquidity may tie up capital for extended periods and require careful planning for potential liquidity needs.

9. Tax Implications

Understand the tax implications of your investment decisions. Different investment vehicles may have varying tax treatments, so consider the impact of taxes on your overall returns. Additionally, some people may not be aware that the income received from investment in ASB is not taxed.

10. Stay Informed

Stay up-to-date about market developments, regulatory changes, and local and global events that may affect your investments. Therefore, review your investment portfolio regularly and make adjustments when needed to help you stay on track with your goals.

11. Educate Yourself

Take the time to educate yourself about investing principles, strategies, and the various asset classes available. Books and reputable financial websites can expand your knowledge and help you make informed decisions. As your investment knowledge grows, you gain the confidence to navigate the financial markets effectively.