Thursday, 18 June 2009

Tips on how investors could build a large portfolio

Wednesday June 17, 2009
Tips on how investors could build a large portfolio
Personal Investment - A column by Ooi Kok Hwa

OWING TO the global economic downturn, some investors may have to put aside their aim of wealth accumulation lately. (Comment: This is the best time to invest.)

For now, wealth accumulation seems to be far away given their current low salary level, worsened by lower bonuses received or no salary increment.

As a result of the uncertainty arising from salary reduction or getting retrenched, some may even need to tap into their savings to survive through this period of difficulty.

We can fully understand this situation. However, we believe that we should consider building a portfolio at this time.

We may not want to rush in to buy stocks now in view of the current high prices. However, we need to prepare ourselves to “fish” good quality stocks at reasonable price levels if the market turns down again.

We will regret if we are not investing during this period because usually the best opportunities are discovered during a downturn.

Nevertheless, some investors think that it may not be realistic for them to invest now given that they are already having difficulties making ends meet.

However, we believe that we need to start somewhere. Every big portfolio always starts from a small one. If we never sit down and start thinking about building a portfolio, we will never get a big portfolio. Hence, we should start now and start small.

When our portfolio is about RM10,000 in size, a 10% return means a return of only RM1,000. However, when our portfolio grows to RM1mil, a 10% return means RM100,000!

Some investors may have the intention of building a portfolio but they do not know how to do so. In fact, some may depend on wealth advisers on this issue.

However, even if we get a very good, knowledgeable and responsible wealth adviser, we also need to equip ourselves with some knowledge in this area to make sure we make sound investment decisions; after all, we need to be responsible for our future.

We can gain this knowledge by reading books related to this topic or attending some training courses. (Comment: Get good financial education early.)

Know what we want to achieve

T. Harv Eker says in his book, Secrets of the Millionaire Mind, that “the number one reason for most people who do not get what they want is that they don’t know what they want.”

For example, if we want to have a good retirement, we will have to know how much we need for our retirement and plan ahead for it. To give you some ideas, there are quite a few websites that can provide free advice on how to determine your retirement needs.

Once we know how much we need for retirement and set it as an objective, we need to focus on growing our net wealth to achieve it.

Sometimes investors are too focused on their current income level and short-term gain that they end up neglecting the long-term growth of their net wealth. (Comment: Focus on the long-term, grow your portfolio, allowing compounding to work its magic over a long period.)

High income does not mean high net wealth if your expenses are higher than your income level. Hence, we need to control and monitor our expenses in order to have a net positive cash inflow instead of outflow.

If possible, we should have a cash budget that will guide us on the expected income to be received as well as the expenses to be incurred in the coming periods. We should try our best to stick to the plan and be committed to build our wealth.

Lately, some investors have been affected by high credit-card debts, which may be due to high expenses that cannot be supported by their current income.

During hard times, we need to plan carefully for big expenses and, if possible, we should delay expenditures which are not critical.

Given that nobody will know when our economy will recover, it is safer to spend less and try to reduce our debts.

In fact, if we have cultivated good spending habits from the start, regardless of economic situation, we will not have the problem of having to trim down unnecessary expenses during bad times. We have seen a lot of successful people living below their means and being very careful in spending money on luxury items. We should learn from these examples.

Don’t look down on low returns

Sometimes, a guarantee of low returns is better than the uncertainties of high returns, depending on the risk tolerance level of individuals. Always remember that risk and return go hand-in-hand. Not every investment product suits our return objective and risk tolerance level. (Comment: The smart investor searches for high returns with low risks ... yes, these investments are available, just be patient and be ready when the opportunities appear.)

Therefore, we need to understand the characteristics and nature of investment products that we intend to invest in before we make any investment decisions.

We cannot always think of big returns without considering the potential risks that we need to encounter. (Comment: Always assess the risk of downside first, then the reward of any upside. The risk/reward ratio should be favourable to your requirement of safety of capital and with a reasonable moderate return, before you invest.)

For those who like to play it safe, it will be wiser to go for defensive ways of investing, which means looking for stocks that pay good dividends and have solid businesses. (Comment: This is the safest route for the less savvy investors.)

Remember, we need to be patient, go slow and steady. If we can avoid making losses during this period, we should be able to achieve our financial goals when the economy recovers again.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

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