FP Article 9
by Rajen Devadason
Always invest for the long term.
what is this 'animal' called
investing, which everyone talks
about and so few excel at?
In the simplest of
terms, it means taking cash you have
- from spending less than you earn
or from borrowing - and parking it in
some instrument that you expect will
go up in value.
Of course, you
already know that. But you must also
realise that just as a child must
learn to crawl before she can walk,
you must learn to save before you
You see, in the realm of saving and investing
there is something called the risk-reward
relationship that almost always holds true.
That's why the more investment risk you choose
to take, the greater the potential (though not
guaranteed) return you might earn. The downside
is that in investment science, the English word
'risk' really means volatility. Murphy's Law has
a tendency to apply in a big way in this arena,
meaning just when you most need to liquidate
your holdings to raise some cash,
you're likely to find your investments have dropped the most
value. That's why you should always put savings
in place first before embarking upon any
This is an article on what investing
is all about. I hope you enjoy
reading it. But if it isn't what
you're looking for, you're welcome
to look for something that does meet
your needs. Thank you for allowing
me to serve you.
A good way to distinguish between
savings and investments is to look at the
inherent price volatility of the underlying
If it doesn't fluctuate, you
probably will only earn a low interest rate on
it. The good news is at least you'll know with a
high degree of certainty that what you've put
into such a savings instrument will be there
when you want to pull it out.
If, on the other hand, the
instrument you park your funds in does
fluctuate, either moderately or insanely, you're
looking at an investment, at best, or a
dangerous speculation, at worst.
Way back in 1997, in my very
first book, Your A-Z Guide to the Stock
Market - and all you need to know about capital
terms, I described the act of investing
in this fashion:
reallocation of cash flows over time with the
aim of enjoying capital appreciation and
increased future income flows.... Because of his
willingness to forgo the 'good things in life'
now so as to have money to invest, an investor
is making an attempt to have even more of those
good things later on.
If you have never seriously and
consistently invested before, I urge you to
begin the process of learning how to do so
wisely before you embark on any actual large
scale commitment of hard-earned capital.
Investors understand the meaning of sacrifice
and delayed gratification. As Timothy W.
Cunningham and Clay B. Mansfield wrote in their
outstanding book Pay Yourself First - a
commonsense guide to life cycle retirement
"Investment capital is created by not spending
everything we earn."
Even more importantly I hope you
will take the time to ask yourself the question,
"Why should I transform myself into an
While you invest significant
mental resources grappling with that knotty,
potentially life-altering question, I suggest
you start saving first... in a 3-S fashion - small,
slow and safe.
If you've never saved any money
before, don't shock your system to such an
extent that you end up throwing in the towel
before you seriously clamber into the 'wealth
Instead, I suggest you set aside
a small amount of money from your weekly
or monthly earnings. Start slow. Put it
away safely in a bank account. Increase
your rate of saving on a consistent basis,
perhaps by just 1 percentage point of net
earnings every three months. It doesn't sound
like much but if you can do that, you'll raise
your personal savings rate by 4 percentage
points in a single year.
The advice that I give my
financial planning and investment clients - in
Malaysia, where I live - is to set a long range
target to reach a 40% to 50% 'savings' rate
within the next 10 to 12 1/2 years.
may seem like a very long time to you, but time
flies by ever so quickly! Wouldn't you rather
reach 'maturity'- before 'geriatric creakiness'
sets in - as a dignified person in great financial shape rather than as
a dried husk of a financial wreck?)
If you answered yes, you
should aim to gradually shift a portion of your
growing savings into investments - once you've
learnt enough about them!
numerous instruments you can use for this
purpose. I won't bother to touch on exotic
instruments that are too complex for me to
understand and too dangerous for most of my
clients to dabble in.
Instead, here are some basic
bread-and-butter suggestions that have the
potential to make you seriously wealthy, if you
exercise patience and are willing to invest for
the long haul.
The primary savings instruments I
suggest my clients use are bank savings
accounts, bank fixed deposits (or certificates
of deposit, CDs, as they are know in the US) and
money market funds.
The investment instruments I have
seen my clients use with great effectiveness
include bond funds, equity funds, real estate
investment trusts (REITs), high-dividend
yielding stocks, and rental property.
Neither list is comprehensive.
Nonetheless, if you haven't even begun the
process of making investing a way of life, those
instruments I've listed here will keep you busy
over the next few years - first learning about and
then buying intelligently.
You won't need to go beyond such instruments to
achieve financial freedom, unless you want to
and have adequately prepared yourself to do so
in the decades ahead.
What you do need,
however, is a burning desire to rewire your
mental pathways so that a decade from now,
someone ask you, "Hello, what do you do?", your
reaction will be:
"I'm an investor. What about
© Rajen Devadason