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I. A clear goal
It is the first step that costs troublesome. The most important thing investors should do is have a clear-cut objective. The investment process consists of investors’ actions to achieve the fixed objective. What lies at the heart of the investment process is investors’ development of and adherence to their investment plan.
It is impossible for investors to achieve an investment objective without a workable wealth management plan. They should carefully consider their needs, objective and time limit for the realization of such objective, so as to select an investment approach consistent with their needs and investment horizon.
II. Accurate positioning
Investors should objectively assess their financial position which includes all assets and liabilities. To this end, a “personal net assets statement” shall be prepared with all assets listed on one side and all liabilities on the other. Then use the assets minus the liabilities. If the assets exceed the liabilities, the net assets are “positive”; on the contrary, the net assets are “negative”.
Investors are advised to update their “personal net assets table” every year, so as to assess their latest financial position. If the net assets are “negative” temporarily, it’s unnecessary for investors to feel discouraged. An appropriate wealth management plan may help them improve the current financial situation.
In addition, investors should analyze their income and expenditure. They are recommended to record their monthly income and expenditure and those of family members, with savings and investments listed. If all the monthly income is used up and there are no additional savings or investments, the spending shall be controlled. A look back at the monthly expenditures will make people find out that small daily expenses should add up to a big fee. That’s why a lot of people develop a habit of saving or investing part of their income before going to the expense. To do so, fixed deposit by installments will be a convenient means through which investors can apply to banks for a monthly automatic deduction of a fixed amount of money from their payroll card.
III. Many a little makes a mickle
If the money for a piece of candy is saved each day, how much money will be saved in a year? It’s RMB465.84 and even more. If RMB1 is spent buying a piece of candy a day, it will cost RMB365 in a year. If the money can be saved and invested in a plan with an annual yield of 5%, it will increase to RMB465.84 five years later and RMB1,577.50 after 30 years. This is the power of compound interest.
Compound interest means investors can obtain the interest generated by the principal and that generated by the added interest. As time passes by, any little saving can grow into considerable wealth.
If an investor is an impetuous buyer, he or she had better make a rule that “don’t buy anything until 24 hours after the impulse. After a day, the impulse may fade away. In addition, the changes sorted from the banknotes in wallet every day, if stored separately, may turn into a big sum of money within a short period of time.
IV. Reasonable liabilities
It is essential to avoid high-interest debts. The annual interest rate of onerous loans that many banks offer credit card users exceeds 18%. If an investor uses a credit card, repaying loans in the interest-free period should be the most sensible decision. After all, the investor can not easily find an investment plan which can provide an annualized return of more than 18%. So, he or she should repay the loan of such a high interest rate first and then consider other investment products if idle funds are available.
Savings allow investors to put money in a safe place where withdrawal is permitted at any time. With good safety and liquidity, savings only produce a small amount of interest. Most smart investors regard savings as an emergency funds, such as use for sudden unemployment. Some people suggest saving only six months of income in banks to meet general emergency needs.
However, when the inflation rate exceeds the interest rate of deposits, can savings be “safe”? Assume an investor deposits one yuan when it can buy a loaf of bread. But a few years later, when the investor takes out the savings, the principal plus interest can only buy half a loaf. That’s why many people who save money in banks still actively seek investment opportunities to ensure the long-term asset value growth.
VI. Psychological readiness
Investment means investors will assume risks greater than savings. Different from savings, securities, funds and other investment products do not guarantee the rate of return. Thus, investors in such products might obtain earnings and assume risks both higher than saving money in banks. Now, even if investment products are bought from banks, they might still face the risk of loss of principal. On the one hand, investments offers investors opportunities to obtain returns higher than savings; on the other hand, investors need to take risks higher than savings.
VII. Decentralized investment
Decentralized investment is often explained into one saying that “do not put all your eggs in one basket”. That is, even if an investment incurs a loss, the returns from other investments may compensate for the loss. Diversified investments can not guarantee that your overall investment will not suffer a loss. It is only designed to reduce the probability of loss across the portfolio or the amount of loss.
VIII. Risk assessment
What is the most suitable wealth management product? The answer depends on when investors need money back, their investment objective and their risk tolerance. For example, if an investor saves for retirement and there are still 35 years before retirement, products with certain risks may be considered. The principal growth will be very slow, if he or she saves the money in banks or turns to low-risk investments. Besides, due to the factors like inflation and taxation, the purchasing power of assets the investor holds will continue to decline. Therefore, it is unwise for investors to invest idle funds in such low interest-rate products as savings for a long time.
If investments are made for some short-term goals, say, the invested money needs be back in less than 5 years, highly risky investment products are not recommended, because they can not avoid price volatility in a short period. If the investor is forced to sell investment products due to the urgent need of money, he or she is likely to suffer losses.
IX. Comprehensive understanding
There is currently a great variety of investment products, such as stocks, funds, corporate bonds, corporate debts, annuities, ETF, monetary funds and national bonds.
As common investment products, stocks, bonds and funds can all be the investment targets for saving money for retirement or college tuitions. Other investment products include real estate, precious metals, commodities and private equity investments. The portfolios established by some investors also cover the above-mentioned products. Investors should be well aware of the inherent risks contained in the various asset products.
Prior to an investment, it is very important for investors to understand the risks of investment products and make sure whether they can afford such risks. At the same time, they should be quite clear about taxes, fees and other cost factors arising from the trading and holding of specific investment products.
(Source: Official Website of Securities Association of China)