Southbourne Group Singapore, Tokyo Japan: Nine DIY Financial Management Tips For Individual Investors
They say you have to spend money to make money, and this is especially true when you're seeking financial guidance. Financial advisors are well-paid for their in-depth expertise and often help their clients through decisions like investing, retirement planning and long-term savings plans.
Although it's still wise to consult a professional before any major investments, you can educate yourself enough to confidently make your own personal financial choices without the help of a professional. Nine members of the Forbes Finance Council shared their best do-it-yourself tips for individual investors looking to better manage their finances.
1. Invest for the long term.
The lure of a quick buck can guide investors to make certain investing decisions. But, unless you're a day trader, a long-term strategy is the best way to protect your assets while ensuring ROI in the long run. The market will fluctuate over time, but history shows that it tends to go up in the long run, so looking to the future will keep an investment plan focused and profitable. - Sari Holtz, DailyForex
2. Open a Roth IRA.
If you're just getting started with investing, a Roth IRA can be a great way to start. Since it is a tax-advantaged investment, it allows your wealth to grow and compound tax-free. Your investments are initially taxed, so you can make withdrawals tax-free in retirement. And, you will typically have access to a wider range of investment opportunities with a Roth IRA than you would with a 401(k). - Elle Kaplan, LexION Capital
3. Don't follow fads.
I believe that everyone can be successful in managing their own finances as long as they are well-informed. A common mistake I see individuals making is investing based on a trend or fad instead of research. Read everything you can get your hands on, and question unproven assumptions. - Mahati Mukkamala, Klaviyo
4. Purchase indexed annuities.
Sold by insurance companies, indexed annuities offer a way to participate in stock market gains while limiting downside risk. When the market is climbing, you'll share in the returns, but you'll be protected from losses by a guaranteed return even when stocks fall. The guaranteed return means that even inexperienced investors can participate without big risk. - Danielle Kunkle, Boomer Benefits
5. Take advantage of money management apps.
I personally manage my own money and regularly use apps like Mint and Robinhood. Mint keeps my personal finances in check, and I invest through Robinhood. Both have extremely low fees and are easy to use. Money management and investing aren't just for the pros anymore; the fintech trend has resulted in new resources and apps at your fingertips. - Rachel Carpenter, Intrinio
6. Invest in a lifecycle fund.
Lifecycle funds require very little work on your part. Unless you really know exactly what you’re doing, it’s the best way to go. As long as you keep stashing money away, it should keep working for you. - Ismael Wrixen, FE International
7. Look into low-cost index funds.
Paying investment professionals to manage your portfolio can often cost you a lot of money unnecessarily. When you add in the cost of actively managed investment options, the average managed portfolio will underperform the market.
The best investment most people can make, whether they're wealthy or just have a few hundred dollars to invest is a low-cost index fund. - Paul Paradis, Sezzle
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
8. Be resourceful with technology.
In the technological era, everyone can be successful with their finances without professional interference. Take advantage of the resources at your disposal. Thousands of apps and websites can aid in the investment process. Record keeping is a must-do, and it’s the only true way to monitor and adjust for proper spending. - Ibrahim AlHusseini, The Husseini Group
9. Budget, budget, budget.
Know how much you spend monthly and what you spend it on. If you're able save $500 to $1,000 each month and place it into an investment account, you will witness the phenomenon of compounding interest first hand. Making this systematic is the key to it actually happening. Don't look at saving money as an idea but as a way of life. You will thank yourself later. - Lance Scott, Bay Harbor Wealth Management
It's a question that vexes many mutual fund investors once they buy into the concept of investing through a Systematic Investment Plan (SIP): When you have a lump sum to invest, then over what period should you spread the SIP? Of course, for most SIP investments, the question does not arise. The most common type of SIP investment is a monthly one that goes out of a monthly income. This sort of SIP continues and is useful in a way to keep investing without bothering to actually take the time out and do it.
However, occasionally, the SIP investor gets a large sum of money at one go. It could be a bonus from a workplace, or it could be proceeds from the sale of some asset like real estate, or it could even be your retirement kitty which you need to spread and make it last for the rest of your life. Investing in an equity-backed mutual fund is the best way to get great returns over a long period like 5-7 years or more. However, over shorter periods, equity funds are dangerous. And when you invest at a large sum at one shot, then the risk is the highest. If the markets turn turtle, you could lose 10, 20 or even higher percentage of your invested amount very quickly. Since the beginning of the Sensex in April 1979, of the almost 13,900 possible six month periods, as many as 2,269 yielded a loss worse than 20%. If you just happened to catch a period like that at the beginning, then you would lose a large chunk of your capital right before it even starts growing. In theory, you could eventually recover, but in practice you would probably panic and pull out your money, making your loss permanent.
The antidote to this is a Systematic Investment Plan. Spread your investment at a monthly periodicity over a certain period. Your entry price will be averaged out and you will be saved from the risk of a sudden decline. Moreover, you will end up buying more units of the fund when the markets are lower, which will enhance the returns you will get. That is of course, the standard set of advantages that a SIP has. However, the vexing question is what is this 'certain period'? Is it six months? One year? Two years? Or even longer? There are arguments for and against.
Last week, I wrote about the research project on historic SIP returns that Value Research has carried out and we saw how SIP was truly safe for about four years and above. In this study, we found that on an average, if you invest in a SIP over four years, then your risk of a loss is negligible. It's also interesting that the risk of loss and the chance of an outside gain are both higher over short periods. Over longer periods, the good times and the bad get averaged out minima and the maxima converge. Consider this, for a typical fund with a multi-decade history, over all possible one year periods; the maximum returns are 160% and the minimum - 57%. Over two years, this becomes 82% and -34%. Over three, 63% and -18%. Over five, 54% and 4%, meaning never any loss. Over ten years, maximum is 30% and minimum 13% .These is all annualized figures. The trade-off is crystal clear--the shorter the period, the higher the potential gain but the worse the possible risk.
The answer from this data appears to be that SIPs must last more than three years. If you seek zero risk of loss, then that is the correct answer. However, for many investments, this is too long. If you are getting an annual bonus from your employer, it would be ridiculous to spread it over 3-4 years.
If you have sold some ancestral property and the sum realized will be the core of your old age income, then you need to be cautious about the risk you take. In a case like this, you would do well to forego some potential income to ensure that you don't make a loss. A rule of thumb is that you could invest the money over half the period that it has taken you to earn it, subject to the maximum of 4-5 years. So annual bonus could be invested in six months, while ancestral property could take five years. It's basically a way of linking risk to how significant that sum of money is for you.