IN my previous article, I addressed how having the right knowledge and mindset will help make one a more sophisticated investor. Let us explore two more qualities an investor should have.
Goals and deadlines
In the professional financial management industry, we can find that most people want to have more wealth but forget the purpose of accumulating wealth. There should be a correlation between setting goals and calculating time horizons for investment profits.
Setting goals can be divided into several aspects:
- Setting the investment period
- Calculating the target required
- Setting the regular investment amount
- Setting the review period and the upper limit of risk tolerance and such.
Setting the above goals is effective in consolidating an investor’s attitude towards investing so that in the face of excessive price volatility, the investor’s will-power remains firm, thus preventing him or her falling into the risk of selling low or chasing high.
Diversification
As the old saying goes, never put all your eggs in one basket. Professional diversification pays attention to risk estimation, ESG index calculation and other factors. How should a sophisticated investor understand diversification?
- Diversified by region: Never focus on investing in one country or continent. The main categories of regions are the US, Asia except Japan, Greater China, Europe and Southeast Asia, among others.
- Diversified by industry: The main categories are technology, finance, consumption and construction, among others.
- Diversified by nature: Blue chip, small cap, growth and income, among others.
According to the history of world development, different economies or fields have their own economic cycle – from the expansion period to peak period to maintenance period to recession period.
We cannot fully predict when a recession or peak will arrive but through proper diversification and regular re-balancing, we can ensure that our portfolio is not overweight in any one sector or region resulting in excess volatility in the portfolio.
You may wish to leverage a professional financial planner to calculate the correlation coefficient of the financial products in the portfolio for you and adjust the portfolio with the lowest correlation as much as possible to ensure the maximum effect of diversifying investment.
In the end, my advice to investors is that like forecasting economic cycles, we will never be able to fully predict the highs or lows of underlying financial products.
Once the goals, deadlines, and scattered settings are completed, you should let go of your mentality and avoid extreme thinking about any possible factors. History tells us that the world economy occasionally encounters recessions, but it does continue to grow.
If you cultivate a good view of investment and financial management, you will be able to have a life of continuous and healthy wealth growth.
Julian Seng, CFP, is a licensed financial planner and a compliance director with Alpine Advisory Sdn Bhd. He is also a certified member of the Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
