Riskgrade Your Investments: Measure Your Risk and Create Wealth

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This time round, the scenario is very much different. The central banks of Western countries, for example, the Bank of England and the US Federal Reserve, use interest rates as part of their monetary policy to control inflation. As inflation goes up, interest rates also rise to counter the inflation. Borrowers may be stretched servicing their loans as the interest rate rises. On the other hand, as base rates increase, the returns on savings should improve. Hence, people will borrow and spend less, and save more. The reason is that Singapore is a small and open economy that imports most of its food and fuel.

With a strong Singapore dollar, we pay less when importing goods from overseas.

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The MAS does not directly control the movement of interest rates as these are independently set by financial institutions. This means that even if inflation is high, the savings rate does not necessarily move in tandem. Unfortunately, individuals have little control over inflation, which can creep up and diminish the value of savings over time. If you think about it, you have probably already hedged some of the higher costs without even realising it. It rose And while prices have gone up, earnings have also increased, in some cases, at a faster clip than inflation.

If you happen to have skills that are in demand, you could command higher earnings. All this shows that the effects of inflation are being mitigated. For lower income families and retirees, the government is offering help through the goods and services tax GST offset Understanding the need for wealth preservation before investing 33 and other rebates. For essential items, NTUC FairPrice and other supermarkets are finding new sources of supply and offering house brands that can keep costs down. However, the best way to mitigate inflation is to have a proper investment strategy. Investing in quality, blue chip stocks has traditionally been the best long-term way to beat inflation.

The only problem is that if inflation becomes a major impediment to economic growth, the stock market will most likely suffer too. One way to lessen that risk is to stick with big, blue chip companies which, by virtue of their size, have more pricing power than small companies.


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Moreover, because they have been beaten down and overlooked, large, blue chip stocks have the least room to fall should inflation threaten the equity market. Another way to mitigate inflation is to consider investing in natural resources funds. The best way to mitigate inflation is to have a proper investment strategy. Demand for oil is strong, and supplies are limited.

With a global boom in commodities — the staple ingredients of a modern economy — many experts see a fundamental shift in the market. For example, the price of wheat and soy beans rose 70 per cent in , while prices of gold, silver, lead, uranium, cattle and cocoa are all at or near record levels.

Planning to invest in MF? Consider risk-adjusted return while analysing performance

This is not a temporary situation, so any investment in this area will probably give you some hedge against inflation. All these strategies, however, call for proper asset allocation. But if you think that the above is too complicated, consider this basic strategy. First, save and invest at least 15 per cent of your annual income. Second, control your expenses in any way possible. Third, buy and hold assets that historically have been hedges against inflation.

Lastly, understand that inflation is difficult to quantify and that your personal experience will differ from others. Ultimately, there is no substitute for awareness of the effects of inflation and being prepared to face it squarely. Individuals must also know the importance of inflation-beating assets and make them part of their overall portfolio. But do you know that there is another way where you pay interest only? So when do you use an interest-only loan? What are the advantages of using such loans? We cannot avoid debt entirely, especially when it comes to acquiring the big ticket items, and not all debt is bad.

But those who borrow must be prudent and know that they can make the repayments.

Even high net worth individuals HNWIs go to financial institutions for loans, which might seem strange since they are presumably cash-rich. But there are situations where it is worthwhile for HNWIs to borrow instead of paying with cash. Some financial institutions offer interest-only loans targeted at the HNWIs. With such loans you only repay the interest, not the principal, so the loan balance remains unchanged.

Most interest-only loans offered by financial institutions are associated with the purchase of property. The benefit comes from being able to save on tax on rental income. This package also works well for short-term investors. By repaying only the interest, investors fork out less cash each month until they sell the property. As a result, they may be able to invest in two properties instead of one.

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But interest-only loans are not for the long term because at the end of the loan period, the payment is raised to the fully amortising level. The payments will be considerably larger because they will be amortised over a shorter period. For example, if your interestonly option lasts for five years and you have a year loan, your principal payments will be calculated on a year term.

As mentioned earlier, your monthly payment will go up — sometimes by 30 per cent or more — when you start paying off the principal. And if the end of your interest-only period coincides with an upward adjustment in your mortgage rate, you could face an even sharper hike in monthly payments. Many borrowers with interest-only loans assume home price appreciation will help them build equity in their homes. But rising interest rates could deflate real estate values in some high-cost areas.

Equity provides a cushion against falling home values. Without it, you could find yourself owing more on your mortgage than your home is worth. One way to avoid this problem is to make a good-sized downpayment on your mortgage. The advantage of interest-only mortgages is that you have more flexibility. Some interest-only borrowers can afford a larger mortgage payment.

Increasing your monthly payments will build equity and lessen payment shock when you are required to start paying off the principal. What worries me is Singaporeans taking two or more mortgages in a rising market. As property prices rise, the dollar amount also rises in line with higher selling prices.


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  8. Affordability becomes an issue. How much should one borrow? There are two ratios that financial advisers commonly use. After all, wealth equals assets less debt. Wealth is built up over the years by accumulating assets and paying down debt, especially mortgage debt. When you pay down the balance of your mortgage, you are increasing your wealth by reducing debt. But an interest-only mortgage does not increase wealth in that way. Of course, you may be increasing your wealth by accumulating assets instead.

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    Your Money Your Investments - PDF Free Download

    While you may have been comfortable being a do-it-yourself investor when times were good, you may find yourself in a difficult position today. It may be time to consider finding a capable financial professional to help you. To me, it is more important for HNWIs to keep the money they have than to accumulate more My advice is to think about security first, not growth.

    But think about it this way: if you have several million in investible assets, you have reached a point where you already have enough. Part 2 Learning from the investment world THIS section will provide you with a better understanding of the world of investments. The investment universe is huge; you can invest directly in stocks, bonds, unit trusts and foreign exchange plus many others.

    How do you manage these investments? I will explain when you should be actively managing your investment portfolio and when passive management is appropriate.

    3 ways to reduce risk in your retirement investment portfolio.

    I am also interested in how the wealthy invest their money. What do they do right in their investments that make them rich? Two articles in this section examine the investment traits of the wealthy and how they invest. There are certainly some very good investment habits that you can adopt.