We often see financial advisors from insurance companies at shopping malls or MRT stations looking for someone to share their new investment product with. While some are too busy to be bothered by them, there are those who will give them a chance to sell their story.
Out of curiosity, I would stand and observe from a quiet corner how the conversation would go. Sometimes, I would hear something like this, “What’s the best investment you have, arh?”. While the number of people asking similar questions is not huge, it is not small enough to ignore.
As Singaporeans, we are always looking to be the best. Yes, we want to be the top in OECD’s PISA test. We want to be the largest fintech and insurtech hub in Asia. And yes, we also want to be the logistics hub in Asia. This pursuit to be the best has trickled down into many aspects of our lives, including our mindset towards investing. This explains why some of us would ask our financial advisor what is the best investment to park our money.
But if we take a step back and think deeper, there is no such thing as THE best investment product. Each investment has its own characteristics and caters to specific investor needs. There is no one best investment product for everyone. Instead, what is important is to determine your investment objective and needs, then assess which investment is suitable for you.
To help you make better decisions in investing, here are three questions that you must ask before going into an investment.
1. Do you know what you are investing in?
Some of you might be puzzled why there’s a need for such question. It’s redundant, isn’t it? Obviously, if you are putting your money in an investment, you should know what exactly you are investing in. So how do you explain what happened in 2009 during the global financial crisis? If we knew what we were investing in, we would have known that we were investing in junk.
Honestly, some of us are sometimes clueless about what we are investing in. This could be due to mis-selling from your financial advisor, too much trust on the advice given by someone or complexity of the investment. So, an important initial question to ask is to question whether we understand what we have placed our money in.
2. Do you know why you are investing in that?
Some of you might answer the first question with confidence. But here’s the second barometer to gauge whether you are making the right investment decision. Ask yourself: “Do I know why I am investing in the investment or financial product?”. While we might be sure of what we are investing in, we might not know why we are investing in it.
ILP vs term insurance
Let’s take an investment-linked policy (ILP) for example. You are absolutely sure about the mechanics of an ILP. You pay an annual premium at the start of every year. This premium will be used to buy units of trusts that invests in stocks or bonds. In the event of death, your family will receive a payout based on the value of units that you own.
Growing your wealth? Or protecting your loved ones?
But did you decide to buy an ILP to grow your wealth? Or did you want to protect your family’s interest in the event of unpredictable events? There are times when ILP holders just wanted to protect their family’s interest in the event of unpredictable events. To protect your family’s interest, a simple term insurance would have done the job. Term insurance would have been the most cost-efficient choice.
Yet, you bought an ILP. It could be on the goading of your financial advisor or the allure of returns from an ILP. Such situations arise because you do not have a clear idea why you are investing. After all, how do you know it’s not the right kind of investment for you when you do not know why you are investing in it?
Have a clear idea of what you want to achieve
To improve your investment decisions, start with a clear idea of why you are investing. For example, is it to accumulate funds for your retirement? Or are you saving up for your children’s education? It is also ideal to know how much funds you need and when you need them.
3. Is this suitable for my risk profile?
An investment can be understandable and meets your needs. However, does it suit your risk profile? Everyone has a different risk profile that requires different investments to help you meet your investment goal. If you invest in something that doesn’t suit your risk profile, you might end up being worse off than if you had not invested.
Hopefully, by asking these three questions, it sets you on the right thought process while thinking about investments.