FinLEAP (financial leap) your finances – Part 5: Investment Portfolio
Over the last few weeks, we have discussed about how to achieve financial security and also getting various investments to get more passive income streams so you can achieve financial freedom. If you have missed the articles, check out the last article here. This week, let’s look at investment portfolio.
There are many investment opportunities available. However, not all the types are suitable for everyone. There are various risks associated with the investment opportunities. Some investment carries higher risk than others. So, it is recommended to have an investment portfolio to balance the return and the risk. You need to decide what investment opportunities to be included. When you have started aggressively to invest, you need to protect your investment assets.
The first criteria for investment selection will be based on your investment goal. It is important to have an investment planning.
Planning means understanding where you are now and your investment goal. These 2 will help you to identify the gap to reach your goal, then you shall know what type of investment yield that you are looking for. Watch this video to understand more about retirement planning calculations. Here is the quick chart for fast investment planning.
For example, if you still have 15 years and RM 1 million gap to reach your goal, if you can save RM 4,000 a month, then you only need to look for an investment portfolio which can generate 6% annual return. If you can only save RM 3,000 a month, then you need to find an investment portfolio which can generate 8% yearly return.
If you are still closing off the gap, you should choose capital gain investment. If you are looking for passive income stream, then you need to choose cash flow investment. Check out this article explaining these 2 strategies.
The second criteria will be risk management. The famous investor Warren Buffett mentioned that we cannot put all eggs into the same basket. Hence, we should look for several types of investment to form a portfolio so that we can diversify the investment risk.
Constructing an investment portfolio is just like playing a football game. We cannot win if we only defend. We have to attack. Inflation is eating into our saving, hence we need some aggressive investment vehicles to beat the inflation. However, if we too aggressively attack and forget to defend, our opponent might win. So, we need to have both defender and striker in the portfolio.
In an investment portfolio, our goal keeper is our cash or saving. We need to keep min 3 to 6 months’ expenses as our emergency fund so that we do not withdraw our investment at the wrong timing when we need cash for certain events.
Our defenders are our bond and insurances. Bond will ensure regular interests to us when the market is bearish. Insurances will pay out when there are unexpected events happen to us like hospitalisation or critical illness.
Then, we have properties and mixed assets unit trust funds to help us staying ahead of the inflation. Such investment risk is not very high and at the same time, they give us some reasonable return. Our strikers will be the shares, derivatives, high yield investment or equity-based unit trust funds. These investments carry more risk with higher return. However, in some circumstances, we might suffer loss due to wrong selection, unexpected event or bearish market.
If we only invest in aggressive assets, we cannot ensure our portfolio is being protected. Having a mixture of these assets will make sure we are balancing our risks and reward hence providing a more sustainable investment portfolio. Watch the Youtube video here on this topic.
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