TO be successful in investing is not about how much investment knowledge you have but it is about how much you understand yourself!
Many people fall prey to their own emotion and wreak havoc on their investment despite having the best laid investment plans.
This is because emotion is the enemy of your logical thinking. Fortunately, there are tools out there for you to discover your personality, and once you understand your personality, you then choose the right investment strategy for your investment.
Risk appetite
In Malaysia, all financial practitioners must now determine their clients’ “appetite for risk” and to check what is their “capacity for loss” before making an investment recommendation for them.
In general, different people will have different risk appetite depends on their ages, income levels, level of experience in the stock market, and so on.
These tests allow you to assess your individual risk levels and to indicate your comfort zone towards investment.
Financial knowledge
Understanding how much financial literacy you have is important as it will determine how much financial risk you are 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 you will make right decisions when it comes to managing your money.
People are driven by sentiment and systems, and our financial behaviours play an important role in our overall financial outcomes. Hence, we need to manage our investment risk through diversification and asset allocation to mitigate our risk.
Time horizon
To create a portfolio based on time, you must realise that volatility is a bigger risk 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 equally important as different life stages will have different commitment level in the family. For example, a couple with a new-born is going to have different requirements from a person nearing retirement.
Investment strategy
After you have done the soul searching part, you would probably have come to a conclusion on what type of investor are you. If you are young with no children, probably you have the capacity to take on more risk than others.
In general, there are two major investment approach, namely active investing vs passive investing. Passive investing involves less buying and selling and tracking index funds while active investors attempt to beat the market by closely following market news or monitor their stock portfolio.
Passive investors
Beginner investors with minimum investment knowledge may prefer passive investing style. They are more likely to hand their savings off to a robo-advisor – an automated, low-cost investing service – rather than take on the challenge of making all the choices themselves.
In another example, some people may have successful businesses and need to focus their energy on growing their business. They would not be distracted by the time commitment necessary for active investing.
Hence, they would park their money with the passive return by buying and holding index funds over a long period of time.
Active investors
Active investors build on the foundation of the passive investor. They take the process to the next level by running their wealth like a business.
The primary difference between active and passive investors is that active investors not only receive market-based passive returns but also gains a value-added return stream based on skill – two sources of return in one investment.
Warren Buffett and Benjamin Graham are excellent examples of active investors in the stock market. They knew the stock market was inefficient and built vast fortunes applying their analytical skills (edge) to find value in securities that the market had under-priced (inefficiency).
Right investment strategy
There is no such thing as the “best investment strategy”. Each type of investing has its trade-offs and there’s no single answer that will be right for everyone. The one that works best for you ultimately depends on your personality, risk tolerance, time horizon for investing, age and investment goals.
Remember that your investing style is not set in stone either. As you grow older and your investment objectives change, so may your preferred investment approach. – Aug 26, 2021
Pauline Yong, CFTe, CFP is a certified member and licensed financial planner at Phillip Wealth Planners Sdn Bhd.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
