Investing 101: What’s Your Investment IQ?

Hundreds of victims of a gold investment scam in Singapore have learned that all that glitters is not gold.  Suisse International, the local company behind the scheme to turn gold bars into panda gold coins, was unregulated and on the radar of Singapore monetary authorities.
Despite thousands of investment frauds each year, inexperienced investors are more likely to pursue such get rich quick investment schemes. After stinging losses, many investors develop a more conservative, diversified investment portfolio.

Know Your Investment IQ

Whether you decide to manage your own investments or hire an investment advisor, your investment performance will benefit from understanding the role of different investment styles, asset classes, risk tolerance and asset allocation in a balanced investment portfolio.

What investments will make you money on an inflation-adjusted basis?

If you put cash in the bank, its value will erode due to taxes and inflation, especially in a low interest rate environment. Government bonds, corporate bonds, preferred stock and dividend stock will provide higher yields. To balance risk, you should always have some cash and other low interest bearing, low risk investments in your diversified portfolio.

What is a diversified investment portfolio?

Do not put all of your eggs in one basket is the best investment advice you will receive as an investor.

A diversified portfolio is a mix of stocks, bonds, mutual funds and cash. A risk tolerance assessment (link) can help you decide how to allocate assets between low and high risk investments. Even within asset classes, diversification is recommended.

Cyclical stocks are affected by economic and industry cycles such as automotive and semiconductor stocks. Non-cyclical, or defensive stocks, protect against stock price swings owing to these cycles. Utility stocks, for example, provide conservative yet steady growth and a reliable dividend stream.

Should I pursue value or growth investing?

The world’s most famous investor Warren Buffet is a value investor. Value investors focus on mature companies with reliable dividend streams. The value investor still looks for high returns by finding undervalued companies whose stock trade below their intrinsic value.

An indicator of untapped value may be lower than average sales, earnings, price-to-earnings and price-to-sales ratios. Growth stocks outperform the S&P 500, but in exchange for higher returns investors accept higher risk. Rather than pay dividends to shareholders, they reinvest profits in growth strategies such as acquisitions and expansion. Growth stocks have higher than average sales, earnings, price-to-earnings and price-to-sales ratios.

What investments will provide more upside growth potential than investment grade bonds?

Remember high growth means higher risk. Investments returning higher growth include real estate investment trusts (REITS), exchange traded funds (ETFs), foreign currencies, growth mutual funds and junk bonds (non-investment grade). These investment vehicles provide ways of adding more upside potential to a diversified investment portfolio.

Should I invest in REITS?

Real estate investment trusts (REITS) own or manage income producing commercial real estate. Types of REITS include residential, office, retail and mortgages. They are attractive investments because they provide steady dividends and capital appreciation. In 2014, REITS outperformed the average Singapore investment portfolio.

What are high risk investments?

Investment schemes are more commonly found in commodities markets – especially precious metals such as gold and silver – real estate investments, and penny stocks. A safer way to gain access to these markets is through mutual funds, ETFs and REITS. Credit rating agencies and other bodies provide credit ratings on individual funds to help you find investments that meet your risk profile.

What is my risk tolerance?

Risk tolerance represents what an investor can afford to lose in an investment portfolio should the market turn against her. There are many factors used to determine risk tolerance including investment objectives, time horizon and future earning potential. In 2014, a third of Singapore investors blamed dismal investment performance on taking on too much risk, according to the Manulife Investor Sentiment Index.

The first step to investing is to determine your risk tolerance, and then asset allocating can be done. Both your risk profile and investment portfolio mix should be periodically reviewed. Consistent with our culture, Singaporeans are more conservative investors. Going into 2015, Singapore investors held 36% of their total asset allocation in cash, above the Asian average, according to the Manulife Investor Sentiment Index.

To enhance your Investment IQ, read our Investment articles.