Adulting 102 - Investing & Insurance
Avoid common pitfalls in investing
Investing is an effective way to build wealth and meet financial goals, but it is important to remember that investing carries risk. Therefore, it is important to manage your risk exposure and steer clear of excessive risk-taking. Here are some common pitfalls to avoid:
1. Not doing your due diligence
Due diligence is a systematic process of analysing an investment decision. This include studying the stocks, sectors and geography that you are investing in. You should ask yourself questions such as, "What are the prospects of this investment?" and "What is the comparative advantage of the stock?" It is also important to consider the market outlook.
Apart from finding confirmation of your investment thesis, you should also search for contrarian views to identify any blind spots that you may have missed.
Never invest blindly, and do not rely on others to do the due diligence for you.
2. Concentrated bet
During the super bull run in 2020 and 2021, it was common to see people betting big on technology companies or cryptocurrencies. However, as we saw in 2022, unforeseeable circumstances could throw your investment thesis out the window in an instant. Therefore, even if you have done your due diligence, never concentrate your portfolio in a single investment, no matter how confident you are about its prospects.
Avoiding a concentrated bet could save you from a lot of financial distress, as evidenced by the negative examples here: https://www.theguardian.com/technology/2022/jul/12/they-couldnt-even-scream-any-more-they-were-just-sobbing-the-amateur-investors-ruined-by-the-crypto-crash
I have no way to verify if the above accounts were true, but I am sure no one wants to find themselves in those situations.
3. Lured by get-rich-quick schemes
This is pretty self-explanatory, but many people continue to walk into these traps because of greed and a lack of due diligence. In the world of finance, if it is too good to be true, it usually is.
4. Not investing
While the above anecdotes may scare some away from investing, not investing is also a pitfall to avoid. Suppose you have $100,000 today and invest it in an instrument with a moderate return of 5% p.a. for 30 years. By the end of 30 years, your $100,000 would grow to $432,194. However, not investing means you incur an opportunity cost of $332,194.
The inertia to start investing can be high, with some people hesitating because they believe they do not have enough to invest, or they think investing is too complex. In my view, neither of these beliefs is true. With the advent or robo-advisors and regular investment plans, you can start investing from as low as $100 a month. Additionally, investing can be simple if you adopt the tried-and-tested principles such as diversification and dollar cost average.
Your investing journey will be marked by ups and downs, but the key is to build up your financial knowledge, manage your risk exposure, avoid pitfalls and learn from your own and others' mistakes.
Insurance is for protection
Insurance is essential for protecting your finances against catastrophic life events that could wipe out your portfolio. Unfortunately, many people overlook the importance of financial protection in personal finance.
There are also those who are overpaying but under-insured, often due to aggressive sale tactics from financial advisors. I'm pretty sure many of us have encountered an over-friendly ex-classmate/acquaintance who suddenly take an interest in how you were doing. Five minutes into the conversation, you learned that he/she is now working as a financial "adviser", and for some reason, he/she woke up that day and felt the urge to protect you financially. The two of you met up, and having little to no knowledge about insurance, you were convinced that whole life (WL) plans and investment-linked products (ILP) best serve your protection needs while also "helping" you save and/or invest. But the person whose interest was best served that day was probably the "advisor" who earned some big fat commissions from those WL and ILP.
Using insurance to save and invest
is extremely costly given the many layers of commissions and fees
that you have to pay. Moreover, the coverage provided by WL and ILP
would likely be inadequate for your protection needs because they are
just too expensive. As a result, you pay heaps for those products, get poor ROI on your investments, and you do
not get the level of protection you need. It is therefore crucial to be aware of the different insurance products available and understand what they are for before meeting with an agent.
It is best to assess your projection needs by beforehand by considering:
1. For which period do you need to be financially protected? Are you likely to still have dependent(s) after 65?
2. In the event of your demise or lost of ability to generate income, how much is needed to support yourself or your dependents?
3. Are your family members protected? For instance, how would it impact your family finances if your spouse lose his/her ability to work? Does your elderly parents have medical insurance in place?
To summarise, it's never a good idea to mix protection and saving/investment. Having basic knowledge of insurance products is essential for making informed decisions about your financial protection.
The content shared in this post is just my opinion and should not be taken as financial advice. In fact, you should never treat what a random dude shared online as financial advice, no matter how credible they may sound.
Nevertheless, I hope this sharing encourages you to think deeper about managing your investment and insurance. Leave a comment below to share your thoughts on this topic!
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