Monday, July 31, 2006

Facts about Investing

Lesson 2: Facts About Investing

A lot of people only think of stock market when they are asked about investment. Many of them would tell you that the last place they want to invest their money is in stock market. They still remember the major market crash in US during 1920an. They would tell you that the stock market is too unpredictable and eventually you would 'burn your fingers' if you try to play with fire. Many Asians are still having nightmares when think about the market in 1997-1998 when there was money crisis in Asia. However, you must remember a few facts here,

a) although most people think that the safest way to invest money is through bank deposit,I must tell you that it is the worst investment vehicle in term of return.
b) although you always hear people saying that the higher the return, the riskier the investment. It is not always true!
c) it would save half your energy if you have written plan about investment and consistent in your investing.
d) stock market is not the only vehicle for you to achieve your financial goals, there are other ways as well such as property investment, mutual funds, money market , gold ........etc

You would feel unsecured if you try to put your hard earned money in something that you do not know. Therefore, for you to start your first investment, learn as much information as possible so that you know your risk tolerance and understand your financial needs.
As I mentioned above, although fixed deposit gives you certain return, this return will be eaten away by your inflation. Although a lot of people hate stock market, history shows that the average return in US stock market is around 10% (before transaction costs and all other expenses) and UK is around 10-12% per year .The lesson to be learned here is you need to know how to diversify your investment in order to earn the maximum return.

I always tell my friends that there are 3 types of investors in the world, one group of investors whom I call as "Kamikaze" group, they would invest in almost everything as long as they think it is a good investment no matter how risky is the investment. Although you may think that these people are stupid, you would be surprised to find that a lot of rich people belong to this group.
The second group, I would say that they are " middle average people". They believe in Confucius thinking of 'walking the middle path' . They invest their money in vehicles that give them the average return with average risk. Another group of people whom I call " sweet dreamers" simply because they sleep well at night no matter how bad or how good is the stock market. They put all their money inside the bank or even under thier pillows. However, they usually would lose in long run in term of return as compared to the previous two groups.

I would like to advise you that which group you should belong to depending on your age group and how much you need your money that you plan to invest. If you are young and have extra money to spare , try to become the " Kamikaze" group, if you are approaching retirement age, then better keep your money in the safest place in the world because you may need them tomorrow!

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