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05 February 2021

A Beginner's Guide to Investing

Have you ever watched the movie with Leonardo DiCaprio or the one with Ryan Gosling? No, I’m not talking about Titanic or The Notebook but rather The Wolf of Wall Street and The Big Short

Besides having a star-studded cast, what do these two films have in common? Investments! 

I’ve always been interested in investments (hence, my choice of electives), but between DiCaprio’s pep talk scene and Gosling’s famous ‘Jenga’ scene, these movies gave me the final push to actually start investing. Plus, with the recent GameStop episode (more on that soon), it really does feel like the time for amateur investors to shine. 

But before you even consider investing to get returns, know what you’re getting yourself into. In financial terms, 'investment' simply means setting aside money or capital expecting to generate an income or profit in the future. Now that's done you know the basic definition of investment, it’s time to ask yourself: 

Why should I bother investing? I haven’t even finished my studies!

There are 3 main reasons why it’d be good to start investing while you’re still in university! 

1: You’d have lesser financial responsibility in university than, say, your mid-30s. Though you may not have a full-time job just yet, you’d have some form of financial assistance either from your family or sponsors. Hence, you’re more likely to have some disposable income* a.k.a extra money.

2: Investing is another method to gain financial independence. After graduating, you’re most likely to land your first job and, more importantly, manage your own finances. By getting a head start, you can be assured that your personal finance will be in check when you enter adulthood. 

3: You’ve the leverage of time! If you can invest for a longer period of time, you’re more likely to get higher returns! Ka-ching!

*Disposable Income: That extra money you have leftover after dealing with required expenses and are thinking of spending.

However, with the possibility of high returns comes great risks that many beginners often overlook. Here are 3 different kinds of risks that you must also consider before investing:

Economic risk: This concerns the economy at large which can include exchange rates going up and down and political stability of countries.

Concentration risk: A perfect example of putting all your eggs in one basket. This risk comes when you rely heavily only on one particular area. 

Default risk: Just like lending your money to a friend, there’s always a risk that the person will not pay you back. Usually, this risk is tied to startups looking for crowdfunding.

 

Now that you know both sides of the investment coin, get your notebook ready and read these handy beginner’s tips.

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What Should I Invest In? 

Are you a person who thrills at the thought of doing something risky, like going on an adventure into the unknown, or someone who prefers something safe, like a road-trip to a familiar destination?

Most times, what you invest in relies heavily on the risks you’re willing to take and how long you'd want to invest in something. So ask yourself this before investing — are you risk-averse or a risk-taker? A risk-taker is more likely to invest in stocks*. On the other hand, someone who’s more cautious or risk-averse would likely invest in safer investments such as a savings account. 

Once you’ve established your risk appetite, it’s time to do your research

Investing in something, like a stock, is never black and white so it’s important to do prior research on what you’re getting into. Ask yourself questions like, “What industry am I interested in?" or “What are the inner workings of that industry?”.  This act is called fundamental analysis where you look into the company’s financial records, external environments (eg. competitors, suppliers), and economic state. 

Similarly to the questions on your first date, this analysis is crucial to determine whether the company is worth your time, money, and attention, so you're fully aware of what you’re getting into. Plus, if you think that investing in a big company will earn you some handsome profits, think twice! Never blindly invest in a company based solely on its past records. Instead, evaluate and understand the company’s work process and the industry’s conditions to know if it will do well in the future. These are some major factors to consider before you even look for a stockbroker*.

Stocks: When you invest in a stock, you own a fraction of the organisation you’re investing in.

Stockbroker: A person that buys and sells shares on behalf of other people or organisations.

Nelissa’s Advice:

Put your trading skills to the test by signing up for free trading simulations on beginner-friendly apps (eg. Plus500) and websites (eg. Bursa Malaysia, Investopedia) before investing your actual money! When you're ready, try out StashAway.

Any Tips on Getting Good Returns Fast?

Ah, the tip for a sure-fire successful investment. Let’s just say that looking for a ‘konfem-profit investment tip’ is as good as looking for the fountain of youth (read as: almost impossible to always make a profit). Instead, here are three tips you must know to make the best investments.

Start Your Internship Right With These Tips 2

1. Eliminate Herd Mentality

Herd mentality is when investors tend to imitate the actions of other investors rather than carrying out their own analysis. A perfect example on why you should trust your own analysis, instead of following the trend, is the recent GameStop fiasco. 

With the pandemic, many retails stores have suffered greatly. GameStop, a retail gaming destination, wasn’t excluded from this. Taking advantage of their loss, a bunch of hedge-fund investors shorted, something like a bet, that their share price would fall. But, a bunch of Reddit users decided to take things into their hands and bought A LOT of these stocks (convinced many others through social media to invest too), leading their shares to skyrocket. 

With many investing in the GameStop stock, what would your next step be? Would you invest in it, and fingers crossed, hope to get some handsome profits? Proceed with caution or risk being extremely disappointed! With everyone invested in a particular company, it’s bound to be overvalued and would drop back rapidly.

It’s crucial to first critically analyse your risk tolerance, understand how much you’re willing to invest (or lose!), and how you’re going to make use of the returns to avoid falling into this trap.

Nelissa’s Advice:

If you’re hearing a lot of GameStop but don’t really understand how it works, here’s a series of TikTok videos that breaks down the meaning of all these terms.

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2. Return to the Fundamentals

It never hurts to go back to basics and re-learn them. For example, if you’re interested to invest in stocks but can’t wrap your head around those red and green little indicators, get to studying! There are various courses and videos online that offer this. If you’re worried that you wouldn’t understand the terms,  there are many channels that break down difficult theories by using layman terms — perfect for everyone at any level. 

Make use of your research skills — the more, the better! Don’t be fixated on ‘catching the trend early’, rather study the various facets of investment. From the types of investment instruments and industry news to annual reports and market forecasts! Besides having the capital, knowledge and understanding of the investment world will be a big help to get big returns.

Nelissa’s Advice:

There are many apps out there worth exploring like Money Race. My go-to learning method is via Youtube. Check out my favourite channels: Trading212 and ClayTrader.

3. Time and Patience

...are an investor's best friends. Even though you’re investing short-term, think long-term! I hold this quote by a top investor of all time, Warren Buffet, close to my heart:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Five years? If you’re thinking, “That’s wayyy too long!” same here. But after re-reading the quote again, I realised an important part. Ah, ‘on the assumption’. I’ve found that when I hold on dearly to this (need I say brilliant?) quote, I’ve made more efforts on my technical and fundamental analysis to stay on for the long run instead of finding quick gains. Although some of the investments didn’t work out, it was fine because I was able to justify my decisions and learn from my mistakes. 

Needless to say, never make a rushed investment but take your time to do your research and truly understand how your choice of investment works.

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“Risk comes from not knowing what you’re doing,” ~ Warren Buffett

Hence, the best investment you can possibly make is to educate yourself on investment. Regardless of your go-to methods — books, Youtube channels or Finance guru, it’s vital to understand the rules of the game instead of diving headfirst! Improving your investment knowledge will help avoid rookie mistakes and (B) unlearn common misconceptions. 

I still remember how eager I was to actualise the theories learned as a Finance major but I also remember how I (epically) lost my first RM1K and succumbed to numerous instant noodle recipes that same month. In all honesty, I was demotivated but I remembered how much I disliked the aftertaste of Maggi and vowed to constantly and consistently educate myself on investment strategies. This bittersweet experience taught me an invaluable lesson: it’s okay to lose some money, as long as you learn from it. 

One last piece of advice before you get started, invest your extra money, but never invest to get extra money! 

Puteri Nelissa Milani completed her Bachelor of Business (Honours) Finance and Economics at Taylor's University in August 2020 and is currently working as an internal auditor with Maybank. She is also a journalist for the independent student-run organisation Financial Literacy for Youths: Malaysia (FLY: Malaysia).

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