7 Golden Rules of Smart Investing for Beginners

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Want to invest but have no idea where to start? Many new investors often make various mistakes due to the lack of knowledge and experiences, and end up suffering losses. But don’t worry because MoneyHero.com.hk is going to introduce you the 7 golden rules of investing, so that new investors can invest safely and wisely without making the same mistakes again!

1. Don’t fall for the hype

Newspaper can only make reports after the market prices go up and down. If you want to make money from your investment, you should take action before the market gets red-hot, since the stock price would probably have hit a record high when there’s a hype surrounding the investment. You should not buy blindly into the hype, or you might end up buying at prohibitive prices. There is no guarantee that the prices will continue to rise and you might have to sell it at a much lower price in the end.

2. Raise Your Target Return by 2%

The growth in value doesn’t necessarily imply a successful investment, as a high inflation rate would still offset the growth in your investment.  If your investment return is lower than the inflation rate (The inflation rate in Hong Kong in July was 2.6%), you are still losing money. Therefore, you should raise your target return by 2% and aim for a return of at least 4.6%. You can opt for mutual funds, index funds as well as insurance policies to brace up for inflation and gain a higher investment return.

3. Spread your risk

It would be best for you to make investment in a range of industry sectors and companies, such as spreading your shares among a medical company, a shipping company, and a property developer. With low level of correlation between these sectors, you can diversify the risks of investment effectively. Since it’s unlikely that all of your investments will perform badly at the same time, a downturn in one industry sector will not adversely affect the overall performance of your portfolio. To make your portfolio fully diversified, you can opt for an investment in an index fund or hire a financial adviser for professional advice to help build your portfolio with a variety of different investments and smaller risks.

4. Don’t invest in unfamiliar ventures

You should not invest in industries or companies that you don’t know very well. Avoid investing in companies if you don’t have a clue about the operation and business of a company. Similarly, if you don’t know the commodities market very well, you would probably find it difficult to understand why a drop in oil prices would bring adverse impact on finance and coal mining companies. With the frequent fluctuations in the markets, it is impossible to adopt a completely passive investment strategy, and you cannot take actions at appropriate time if you are not informed of the current situation of the market. Moreover, failure to understand the investment may pose serious problems in your finance planning. For instance, if you don’t understand the guaranteed and non-guaranteed returns of an endowment policy, the odds are you may get back less than you invested.

5. Settle Your Debts First

You should clear your debts before investing if you run up huge debts on your credit card or have applied for a personal loan with high interest rate. You might think that you can pay off the debts with the profits generated from your investment but the chances are slim, since it is incredibly difficult for most new investors to get returns of even 9%. Moreover, with the inexplicably high credit card interest rates, you might be overwhelmed with the enormous interest costs before you make enough profits to clear your debts.

You might apply for a debt consolidation program by which you can consolidate your credit card debts into one simple loan and reduce interest expenses. Alternatively, you can make use of our comparison tools to help your find out the best personal loans in Hong Kong.

6. Invest and Save at the same time 

It is not easy to take money out of a mutual fund or structured deposit if you are in need of money all of sudden, and you probably will make a loss even if you can withdraw your money. That’s why it is necessary for you to build up some savings for a rainy day. Illiquid assets such as properties, luxury watches and jewelry should not be counted as savings because you cannot sell out these assets immediately for money in times of emergencies. Therefore, it would be better for you to have both a savings funds and an investment fund. If you don’t have enough money to set up two funds, then save up at least 6 months of income before you start making any investment.7. Give yourself a 2-weeks cooling off period

7. Give yourself a 2-weeks cooling off period

You should take a step back after making any huge loss on investment, as many people fail to remain calm and tend to double their bet in hope of winning the money back. This is not only common among new investors, but also experienced traders and professional fund managers. Many people get panicked and would grab any opportunity to win the investment losses back. But this kind of high risk gambles usually result in even bigger loss. That’s why you should step back from the market and give yourself a two-week cooling off period after making huge investment losses. Review your investment portfolio and think thoroughly before you make your next investment decision.


Interested to know more investment tips?

Read more: 4 Tips for Women:  How to Save Money for Investment

Read more: MoneyHero.com.hk’s Top 10 Personal Finance Tips from 2015

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