Make Your Money Work For You (3rd Edn)

Do not take investment lightly — one mistake can set you back for a long time.

It is horrible to retire when you don’t have enough money, and even worse if everyone around you has enough and you can’t even get by. That is why learning how to invest is so important.

You may not need so much ready cash, especially if you are still a good way ahead of your retirement age. We recommend you save three months’ salary. First, some of this money can be invested in financial assets such as bonds and unit trusts, since they can be liquidated almost any time, with little or no penalty. Second, if you have a working spouse, there should be sufficient “back-up” income in the event of an emergency.

Even smart people can make silly mistakes when it comes to investing.

BIG MISTAKES CAN SET YOU BACK — PERMANENTLY

An investor needs to do very few things right as long as he or she avoids big mistakes.

What history tells us is that there is a positive relationship between risk and return, and we can assign relative risk levels to the three investment choices as follows:

TABLE 1.3. RELATIVE RISK LEVELS

Investment Choice

Risk Level

CPF OA

Low

STI

Medium to High

S&P 500 Index

High

We can see that looking at returns without considering risk is clearly a major mistake for any investor. But we are sure you will agree that if you want to seek out the best returns, you will have to tolerate some risk.

Investing in the S&P 500 produces winners and losers, and along with that, a sense of unpredictability.

Risk is the possibility of losing money on our investments. The CPF OA rate of 2.5 per cent is an almost unchanging rate. It may move up a little, or go down a little, but it will never hit negative, which means that we can’t possibly lose money.

If we were given these three investment choices, the obvious choice would be the S&P 500, which provides the best returns.