By Robin Wong
You might be in a financial position where you’re ready to step into the world of investments, but with all the different types of asset classes available, it can get overwhelming deciding on which to go for. There also begs the question of whether you should stick to just one type, or cast your net wide.
To help you start off on the right foot, here are 7 tips on choosing the right type of investments so that you can build your portfolio steadily in a way that best suits you - with lower risks and higher profit margins.
1. First focus on one type of investment, and become an expert in it
As billionaire Warren Buffett often says, “Always operate within your circle of competence”. For starters, know what you are good at, and branch out from there. For example, if you are currently a real estate agent, investing in property would probably be the most logical choice based on your industry expertise.
Not to worry if your present skill set or career background may not be relevant to a particular investment vertical. Select one you are most passionable about - be it equities, fixed income, commodities, or real estate - and take the time and effort to learn as much as you can about it before diving in.
As for myself, I mainly invest in equities and bonds, and undertook most of my learnings through books, investment articles, YouTube videos, investment interest groups, training courses and public seminars. There’s a whole myriad of resources out there, and many are free of charge.
Some people might want to start their own company and become an entrepreneur. I have always had great admiration for those who are willing to take the plunge of a business start-up. In today’s highly technological environment, one can build a company at a relatively low cost. What is needed is an innovative and creative idea that can meet the needs of the market.
2. Profit well in one area before moving on to another
Don’t get too excited trying to tackle multiple asset classes at one go. Have patience and make sure you profit well in one area first before moving on into another. Most successful investors focus on one major area rather than over diversifying.
For example, Warren Buffet specialises in equities investment, Ray Dalio is in hedge funds, and Bill Gross is in bonds. Robert T. Kiyosaki’s portfolio is more diversified, but he does have a keen interest in real estate and tends to focus a little more on that.
3. Warren Buffett’s advice: Invest in a single strong fund over a long-term period
Take it from a billionaire - Warren Buffet has one surprising but solid word of advice for all investors: Park a majority of your available savings set aside for investments into a single S&P 500 index fund, which represents the top 500 US-listed companies with broad international exposure.
Based on past events, it has been proven time and again that a majority of investment managers cannot outperform this Exchange Traded Fund (ETF). While nothing is foolproof, you have high chances of gaining very pleasing returns over a long-term period when investing your assets in this ETF in a disciplined manner.
4. Know when to diversify or concentrate your investment portfolio
There is a fair amount of controversy regarding whether one should diversify their portfolio or focus on a few quality companies. I have studied the strategies of both Warren Buffet and Ray Dalio - both of whom are some of the most successful investors in recent times, and take very different approaches from each other.
Warren Buffet favours concentration on a fewer number of quality companies, while Ray Dalio prefers a broader diversification to handle the unpredictable and volatile market. On deeper understanding of Warren’s and Ray’s respective rationales, they actually have a lot in common.
With regards to Warren’s school of thought, concentration makes sense if you are highly knowledgeable in analysing companies’ financials and fundamentals. If you are not an expert, it is better to diversify so that your performance is in line with the overall market growth.
5. Invest regularly and consistently, i.e. the cost averaging method
While Warren is a fan of investment concentration, he stresses that one should not put their eggs in the same basket all at once; According to him, the key is to invest regularly and consistently, either in monthly or quarterly intervals throughout the year - also known as the cost averaging method.
Cost averaging helps you secure long-term financial independence in a safe and achievable manner, such that any market volatility will not negatively impact your finances too greatly.
6. Don’t be afraid to take risks, such as borrowing money
“Don’t work for money, make it work for you” - Robin Wong
Borrowing and incurring debt to make a profit often gets a bad rap, as it comes with risks. However, even the most successful investors, including Robert T. Kiyosaki, do use some form of leveraging at times to generate millions in profit. To further quote him:
“I was involved in redeveloping some old properties. At the time, the interest lending rate was extremely low and the potential rental income was high. I borrowed directly from the bank, whereby I could achieve positive cash flow immediately upon refurbishing and renting the properties. I kept the properties for a few years and when the property market started to boom, I sold them at a good profit.”
Having said that, Robert acknowledges that it is imperative to have substantial experience in investing, and do thorough research of your own before applying this approach. This concept applies to all types of investment, be it in equities, bonds and real estate.
With every investment comes a risk, but this can always be managed; The more knowledgeable you are, the less risky it will be.
In fact, not taking any risks in life can be a risk in itself - of losing out on all the opportunities waiting in store.
7. Follow industry key opinion leaders on social media
A habit I have recently developed to improve my investment return each day is to spend the first 30 minutes of each morning scrolling through social media to study the latest investment news. Following industry key opinion leaders is also very helpful, as they regularly share on developments on key economic and investment trends in the most timely manner.
This has allowed me to become in tune with the latest thinking of the best investment gurus, which in turn helps my asset allocation strategy. In today's fast-paced environment, it’s not just about the knowledge that you have, but also the speed of receiving information which plays an important factor in one’s success.
There’s the timeless wisdom of world-famous experts like Warren Buffet, Ray Dalio and Charlie Munger, but there are also gems from lesser-known names which can be discovered via social media. Of course, the biggest challenge is to be able to distill key information that you can trust, as there are many unscrupulous speakers out there who give opinions with a hidden agenda. My advice is to take everything with a pinch of salt, and test it out over a period of time.