The other day, someone wrote to me. She asked, ‘Suraya, can you do a post about getting over one’s nerves when investing for the first time?‘
This person has saved up some money but found it difficult to proceed to the next step – actually starting with the investment. She doesn’t have any high-interest debt. She knows that she will have to invest her money for her future, but how can she be ‘sure’ of her investment choice, she asked?
Investing for the first time, the checklist
This post is not about the ‘process’ side of investment. She knows very well how to open investment accounts, how to research different investment types, how to use online tools. It’s the ‘being sure’ side that she wants to know.
So I told her I’ll write about what works for me, and the steps that I go through when I add a new type of investment into my portfolio. Hope this will help everyone else.
Disclaimer: I’m not a certified financial planner or anything. Take this article with a pinch of salt, and ask other people more knowledgeable about this. If anything is wrong, please let me know by commenting.
#1 – You checked for red flags. It’s not there.
The first line of defense when considering every new investment opportunity is making sure it’s not an investment scam. I wrote about identifying these in the article How to spot investments that are actually investment scams.
Note that sometimes it’s not the investment type, but the company offering it that is scammy. If the investments you’re considering tick any of these boxes, you need to reconsider.
- Multiple hits from Google search when you type ‘Company name + scam’
- Any variation of ‘guaranteed return of investment’ or ‘daily/weekly/monthly profit’. If the company promises this, run.
- The company’s founders and/or management team was involved with some dodgy things in the past.
- Any mention of recruiting investors under you. That’s a sign of MLM, or worse Ponzi schemes
Know for sure that the company is reputable and legit? Awesome, let’s move on.
#2 – You are comfortable with the investment’s risk level
Investments are not created equal (you already know this). Some of them are truly safe; you know with a degree of certainty that you won’t ever lose your money, like fixed deposits. Some of them have higher risks and can possibly make you lose (a portion of) your initial investment amount.
- If you are investing for the first time, choose a safe investment first. The learning process will prepare you for the higher-risk investments. Safe investments should be boring; usually just do one time and forget about it. For the record, I’d consider the following as safe investments: fixed deposits, low-fee unit trusts/mutual funds, blue chip stocks, ASB and similar.
- If you already have mostly safe investments, consider medium or higher risk investments that you have an interest in. Many factors will affect the return on investment – you want to make sure that you have the mental capacity to be at least mildly excited about news updates and make adjustments to your portfolio when needed.
My first ever investment was ASB. That was boring; go to the office, create an account, transfer the minimum amount, then periodically add more money to it via online banking. Find out the dividends announcement once a year, and if I’m not lazy I’d go to the post office to update the accounts book so I can grin at my new balance.
(Technically, my first investment was EPF. That one more boring and mandatory anyway, so I won’t count it)
My second investment was gold, if I remember correctly. Still considered a safe investment, but in recent years it’s a bit more volatile so I’d rate this as medium risk. I still keep gold now and once in a while I check back that it’s still performing okay. If it the value drastically goes up or down, I’d consider selling or buying more gold. The fancy phrase for this process is ‘rebalancing your investment portfolio’.
Higher-risk investments tend to have higher returns on investment, but only if you can stomach the risk. This brings me to…
#3 – Your risky investments = the amount you can afford to lose
I’m still young, so I can afford to take higher risks at this stage in life. For example, I keep more than 50% of my money in high-risk investments (bitcoin and cryptocurrencies). I’m aware I can lose that 50% very fast if the market decides to turn against me (touch freaking wood).
However, I know I can afford to lose that amount if shit hits the fan. If that happens, I will work my ass off and earn back the money through active income (ie my day job). Time is on my side.
If say my safe investment: risky investment ratio tips over to 10:90. I am not okay with this. I do not want to potentially lose 90% of my money. So I turn back some of the bitcoin to MYR and channel it back to safe and medium-risk investments. I’d say 50% or more in high-risk investment is my max.
The ratio is different for everyone. Men tend to take higher risks, so take note – this can be your downfall. As a general rule, the younger you are, the higher your risk tolerance, because you can still recoup the lost money by working for it.
However, I also know some young people who are not comfortable with high risk. Maybe they are breadwinners of their families and don’t want to jeopardise their family’s future with their investment choices. That’s fine too. Keeping most of your money in something safe-ish like mutual funds that average 7-8% per year is also a good investment strategy.
If you’re young but not sure which higher-risk investment to go with, it’s also okay to start with 100% safe investments and slowly introduce small amounts of higher risk investments to diversify when you’re ready. The point is to start 🙂
#4 – You know, more or less, when you need the money
Some investments really lock in your money; you can’t access it in the near future. For example:
- Property. Reselling properties in the first five years after purchase got high tax one, many people avoid unless they plan to live there long term.
- Anything retirement-related like EPF and PRS (Private Retirement Scheme). Can only access after you retire.
- Anything with time-based contracts like fixed deposits and peer-to-peer lending. You commit to only getting back your money after the contract ends.
‘Locking in’ your investment is not necessarily a bad thing. Sure you can’t access it, but you also won’t be tempted to spend it or sell your investments for a loss. It’s good for people who have a spending problem or tend to make impulse decisions. However if you plan to migrate soon or have plans for the money before its ‘unlocked’ to you, then I don’t recommend these types of investments.
If accessing the investment money is important to you, then pick something that can be easily liquidified, aka turned back to MYR relatively fast. Some which are fast includes:
- Stocks. Mind the fees. See #5
- Non-retirement-earmarked unit trusts and mutual funds. Mind the fees. See #5
- Cryptocurrencies. Mind the scammers.
- Currencies and Gold. Mind the spread. See #5
- And more.
Note that you can either make a profit or a loss on the above, but hey they are some of the options available if you value access to your investment money, fast. ‘Fast’ here ranges from minutes to days. For my amateur writeup on different types of investments available in Malaysia, see What can you invest with RM1000?; A quick guide.
#5 – You note the fees and spread (and choose low-fee and low-spread options where possible)
ALL private investment platforms will have fees. The ones that say they don’t will have higher spreads aka indirect fees. The only investment platforms without fees that I can think of is some government-linked mutual funds like ASB and Tabung Haji.
I’m not the biggest fan of fees but I guess I have to suck it because employees need to be paid somehow right. But the rule of thumb is, the lower the fees, the better.
For Private Retirement Scheme offering retirement-earmarked unit trust, I went with FundSupermart. Just 1% management fee from them. I’ve heard some unit trust providers charge up to 6% fee, crazy! Even if you get 10% annual return on investment from them, you only get 4% in profit after all those fees!
Another thing that needs an attention to fees: stocks and REITs. They need CDS accounts, and there are a few companies offering these accounts with differing fee structures. DividendMagic nicely compiled the rates in here.
Let’s use gold to explain spread. Let’s say a legit company offers you to buy/sell gold on their platform. They sell it for RM150 per gram of gold (example), and buy it back from you for RM145 per gram of gold (example) on the same day. That RM5 difference translates to 3.45% spread, or how much profit the company earns when they resell the gold that you sold to them.
Ideally, you want the spread to be as low as possible. However, it’s okay to pick a gold investment company with reasonable spread (not necessarily the lowest) if they are reputable and can guarantee safekeeping and quality of your gold. The same applies to other investments that use spread, like currencies. You do NOT want your investment to disappear along with the company one fine day. Nuh uh.
#6 – You accept the responsibilities of a DIY investor
DIY investing is an investment style that doesn’t involve a fund manager. Many people start with this option – they make their own choices on what to invest in, after doing self-research and careful deliberation. I’ve yet to come across someone (online and offline) who uses a fund manager, to be honest. I think they’re more for the HNW/UHNW (high net worth/ultra high net worth) individuals, but you can let me know if I’m wrong.
DIY investing means that:
- You get to choose your own investments. Fun! See: 12 Types of Investment Available in Malaysia and The People Who Have Them
- You have to keep track of all your investment accounts, including the security side. Enhance your security with these digital security tips.
- You decide how often you want to contribute to your investments. You can automate this and set up auto-monthly deductions. You can also take advantage of taxes and stuff – for example, I will contribute at least RM3000 to PRS every year because that will give me tax relief.
- You balance your portfolio yourself. This means checking your investment portfolio at least once a year and make sure you’re still comfortable with the risk level, and move the funds around as needed.
Personally, I use an app and a notebook to list down all my investments, the amounts and the percentages. For example, I have:
- ASB, RMxx, xx% (low risk)
- EPF, RMxx, xx% (low risk)
- PRS, RMxx, xx% (low risk)
- Gold, RMxx, xx% (medium risk)
- Bitcoin, RMxx, xx% (high risk)
Again, when the last two combined make up more than 50%, I get nervous and make the appropriate adjustments.
In some Western countries, robo-advisors are getting more common. They ask you a bunch of questions, and from there make investment recommendations for you, much like a fund manager. I believe no robo-advisors serve the Malaysian market yet, but I know that Securities Commission already have a framework for it and I look forward to trying it out when it’s available.
The above is pretty much a rough guideline for you guys who:
- Are investing for the first time, and having anxiety over it
- Need a checklist before committing to a new investment
There are other things to know. The timing of the investment (ooooh, tricky), the fair value of the investment choice (there’s calculations for stocks and stuff, to avoid buying overvalued stocks), and some others. You can slowly learn about these, but don’t let it stop you from investing in safe investments first. Time is the key ingredient that will make you money, so don’t waste too much time waiting to ‘know everything’. There’s no such thing.
I highly suggest subscribing to Investopedia’s newsletters. They send over easy-to-understand materials about various types of investments. You can also read my ‘I just want to invest; what does these investment terms even mean?’ article.
Did I miss anything important? Do you have additional questions? Any wrong or misleading info in here? Do comment, would love to hear from you. If this article helped, please share 🙂