10       Tips to Investing Wisely in the Capital Market

1.         Know what investment products are available

The Malaysian capital market offers the following investment products:

besides the non-capital investment assets of bank savings, property, insurance and collectibles.

2.         Know your investor profile
A wise investor chooses one or more of the above investment assets not only according to his goals and the amount of capital available, but also according to his own tolerance for risk. All investments carry risk; some very much more than others. You have to find out whether you are "risk-taking" or "risk adverse" type of a person, so that you can pursue an aggressive, moderate or conservative investment programme. In other words, an investment strategy that fits your risk profile, as you have to be comfortable with your choices. If, for instance, you can't stomach risk at all, then don't include equities with its propensity for price oscillations in your investment portfolio. As a rule of thumb, you can be as aggressive as you like as long as you don't lose sleep over it.

3.         Choose the right investment products

Bonds, commodities, futures and options are the esoteric capital instruments that attract institutional investors and require astronomical amounts of capital to trade. You, as a retail investor, might be more comfortable trading in equities and unit trusts. But which should you choose?

If you are one who spends time researching on stocks and market trends and enjoys the excitement of testing your skills in the share market, then direct stock investing is probably for you. If, on the other hand, you want to be relieved of the day-to-day worry of personally handling a host of direct investments, have small sums to invest each time and seek diversification as soon as possible, you will want to consider investing in unit trusts.

4.         Do your homework before you invest
Don't put your money in until you have understood all relevant information regarding the investment.

For stocks & shares, it means selecting your stocks based on good old fundamentals, rather than on hot tips. Prepare yourself to do the vigorous homework of analysing company annual reports, accounts and other statements while keeping abreast of what's happening in the industry, country and elsewhere in the investment world. You might want to consider marrying this fundamental analysis approach with intelligently trying to time your entry into the market. Be sceptical of anything recommended by friends or picked up from rumours, particularly if you cannot explain their choice by rational reason. The rule with buying stocks is caveat emptor: let the buyer beware.

For unit trusts it means scrutinising closely the unit trust fund as well as the management company before you invest. Read and understand the fund's prospectus, the trust deed, financial reports, its investment objective, where and how your money will be invested, associated risks and fees. Do your research, gleaning clues of the company's funds performances over time compared with peer funds - it is the fund that outperforms its competitors (but it may do it by adopting higher risks) when the market is not doing so well that deserves your consideration. But also note that a fund's track record is no guarantee of its future performance.

5.         Build your buffer first

Do not embark on any investment programme if you have not built up a cash buffer of between 6 and 9 months' expenses to take care of financial emergencies. The buffer is vital as otherwise a financial mishap can cause you to plunder your investment programme too early for it to gain momentum. Also settle short-term, consumer-driven debts first before using savings to invest. Understand the greater risk of investing with borrowed money.

6.         Think long-term

Short-term thinking can short-circuit long-term effectiveness. Bear in mind that in any investment, there will always be short-term aberrations that will even out in the long-term, so have the sustaining power to hold your investments for longer periods. History has shown that investment markets always recover and move on to new heights. But if you decide to turn speculator and go for quick-grabs, do so with your eyes wide open and never with more money than you can afford to lose.

7.         Utilise dollar-cost averaging

This wise strategy makes market fluctuations work to your benefit because the process of investing a fixed amount of money at fixed intervals over a period of time works to render a net effect of reducing your long-term average cost per share. It is a great way to purchase volatile equities because it allows you to buy more units of an investment when prices are down and less when prices are high. It is also a substitute for the stressful strategy of trying to time the market.

8.         Avoid putting all your eggs in one basket

The best way to minimise total risk while keeping return rates high is to diversify your investments across various investment products and within asset classes. If equities are your sole investments, it makes sense to diversify across different companies and sectors; if it is unit trusts, invest in several types of funds instead of just one. The loss made by some counters/funds can be absorbed by the gains made in other counters/funds. There is no excessive exposure to the vagaries of a single investment. As they say, there's safety in numbers. However, avoid over-diversification. Too much diversification sees your portfolio's performance regressing to the mean of your benchmark index.

9.         Stay on course

Review and monitor your investments regularly to ensure that your investment programme is still relevant to your financial goals. Track the performance of your investments to determine whether your expectations of returns have been met, or is there a need to restructure your investments if your asset mix gets out of balance. Don't be afraid to swap one investment for another if the former is overvalued and the latter undervalued. But switch to preserve your capital during times of market uncertainty, not to chase after elusive, higher returns.

10.      Beware of scams

Be wary of promises of quick profits or sky-high returns. In December 2001, the Securities Commission took action against bogus spot commodity trading firms that were fleecing unsuspecting investors off thousands of ringgit through their schemes. Read more about such scams in http://www.sc.com.my/html/resources/fr_resource.html.

Sources: http://www.min.com.my