Presuming you don’t have significant debt, you have an adequate emergency fund, you have saved each month, you can sleep well at night during the ups and downs of the market and you have at least a 5 to 10 year investment time horizon, it is probably wise to invest at least a part of your hard-earned money in the stock market.

Why all the warnings?

The goal of investing in stocks is to grow your money over time. And we’ve already seen that in any one year (and often longer) the market can experience unexpected volatility. If you need your money in short term, the stock market isn’t for you.
Plus, if you have high debts on credit card, don’t invest. Instead, get rid of that debt first because you get a high guaranteed “return” from the interest that you just saved that is 18% per annum!

If you don’t have sufficient liquid fund set aside and you run into an urgent, unexpected need for cash, you’ll  be forced to sell your investments. If that happens at a bad time and the market is weak, you could be left with no choice to sell at losses. That’s why you should first set up an emergency fund that is appropriate before investing.

And that’s not all.  You must be prepared emotionally to stick with your investment strategy through high and low to be a good investor as well. Many people aren’t in a position to do that. And what happens is that they respond emotionally when the market takes a tumble and cash out at often the very worst times.
Individuals often pull the plug at the exact times that are wrong a result of fear.

This is not to say that you are guaranteed a great return if you hold on for 5 or more years. There are no promises. There have been many long stretches of time with little or no return in the market. In order to make money in the market, the longer you invest and the longer you stick with the right strategy, the better your chances are.

Stocks or Funds?

When people invest in the stock market they either do so by purchasing individual stocks or funds. There are other ways to invest. But so far, these are the two most popular.

When you buy individual stocks you are making a large bet on one company. When you buy a mutual fund the unsystematic risk ( or specific risk) are dispersed. That’s because of the diversity in a mutual fund. One particular mutual fund often own hundreds or thousands of different stocks.

So, you might invest RM100 and buy 1 lot of ABC stock for RM1 each if you buy stock in one company.
However, you might own a little part of 100 different company’s stocks held in that fund if you buy 1 shares of AAA Mutual Fund at RM1 each. That means you have a lot less risk with funds as opposed to stocks.

Do funds make more money than stocks?

It depends on which funds and which stocks you are referring to. You will likely make more money with individual stocks if you are good at picking stocks and enjoy the process. However, it’s important to keep in mind that with individual stocks you have to do your own research. Also, remember that if you go this route, you should plan for an ongoing time commitment to manage your stocks.

The market situation may change. You might not want to buy a stock and hold on to it forever. Stocks that are doing well today could go south tomorrow. That’s why it’s important to have a strategy to manage your stock portfolio that indicates when to buy and when to sell rather than simply buying stocks that are popular at any one time and holding on to them forever.

The bottom line is that many people find it more efficient and less risky to buy mutual funds than individual stocks.

Which mutual funds are best?

The answer to this relevant question depends on your investment style and strategy.  Keep in mind that all mutual funds are not alike. There are bond funds, stock funds, international stock funds, large cap funds, small cap funds, value funds, growth funds etc. The list goes on and on.

Investing Is NOT Just About Making More Money

Smart investors know that investing is not just about getting the highest return possible. What you want to do is balance your financial goals with your emotional well-being. It makes no sense to invest super-aggressively if it keeps you up at night. On the other hand, if you invest too conservatively, you may not reach your financial goals.

How do you find the balance?

My suggestion is to first get an assessment on your personal risk tolerance. One way to do that is to take this investorprofilequestionnaire or another risk survey. This will provide an overview of what kind of investment mix you might feel comfortable with.

Then, test your comfort zone against your financial plan. Does this kind of asset mix have a high likelihood to help you achieve your goals? You will only know this if you run your retirement projections.

What is good in having a portfolio you feel comfortable but doesn’t have a high likelihood of getting you where you want to be?

The Last Filter

Now that you know what your risk tolerance is and what your long-term goals are, the next thing you should think about is your priorities. Are you in debt? Are you going to buy a house or spend a lot of money in the short term? How far away are you from retirement? Your investment plan should be customized to accommodate these very unique situations.

Before You Start Investing

Now that you have a solid understanding of how investments work, we’re almost ready to invest. Keep in mind that I don’t know your unique situation or risk tolerance. That’s why this guide is going to provide general guidelines for you. Before you implement these ideas I strongly suggest you speak with your licensed financial planner.