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Your beginner's guide to investing

Investing may help you grow your money to hit your goals and give you an opportunity to get the future you've always dreamed of. But all types of investment come with risk, so it's important to learn the basics and work out whether it's the right path to take for you.

Wondering how to invest or where to start? Looking for some investment basics? This simple guide is the perfect place to begin: we'll explore the fundamentals of investing, provide you with some important questions to determine if this is the right journey for you, and we'll cover some useful tips for beginner investors to keep in mind.

What is investing?

Put simply, investing is when you allocate capital or resources, expecting to generate income or see an appreciation in value at some point in the future.

Investing has the potential to give you a better return (called return on investment, or ROI) than a savings account in the long run, but there are no absolute guarantees - all investments involve risk. The value of any investment can – and will – jump around, so it's possible you could get back less than you put in.

Wondering what to invest in? Well, there are the more common types of investments – such as gold, bonds or shares – and there are the more unusual – coins, comics or cryptocurrencies. But the ultimate answer is: almost anything!

How can you make money from investing?

There are 2 main ways you can make money from investing:

  • Growth: otherwise known as capital gains, this is when you get back more than you put into an investment. For example, you buy shares (or units in a fund) at one price, and sell them later for a higher price
  • Income: when a company or fund makes a profit, it may decide to share some of this with its investors, through dividend payments. Bonds also provide regular interest payments

Thinking about how to invest? Consider your current circumstances and goals, Investing for income could be a good shorter term strategy if you're nearing or already in retirement. By choosing shares or funds that pay you dividends, or bonds that pay interest, you can receive regular payments to boost your existing income or pension.
But if you're just starting out in the workforce or only have drawn a salary for a few years, you still have more time on your side to grow your money. Investing for growth could be a good option for you, in this case. The potential for capital gains could wind up being greater than what you'd get out of investing for income.
There's the elephant in the room to consider as well: can you lose money from investing? The short answer is: yes, you can. Markets go up and down all the time - this is just how markets work. So at some point, this market volatility might mean you could lose money on one of your investments. This happens to even the world's most successful investors and it shouldn't be the reason to shy away from investing.
Why? Consider this: you're already losing money to inflation. Thanks to inflation, things get more expensive every day. In just 5 years, you'll be able to buy less with your HKD100 note than you can today. This setback isn't just limited to people who keep their money in biscuit tins under their beds: because interest rates are low, any money sitting in your bank account 'earning' interest is probably growing at below the rate of inflation (which is currently just under 3% 1).
This is where investing comes in. It's an important tool that can help reduce the impact of inflation and protect your savings for the future.
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Is investing right for you?

Now that you know how investors can make money from investing, you still need to decide if it's the right decision for you. To figure this out, start by asking yourself a few questions.

What's my current financial position?

If you've got unsecured debt, such as credit cards and loans, it's usually wise to pay them off – and build up some savings – before you start investing.

Ideally you'd have an emergency savings fund worth 3-6 months of your living costs first. This way, you'd have money available to cover unexpected costs and unforeseen circumstances, without needing to dip into your investment pot or worse, sell your investments.

You should also consider how much liquidity, or cash on hand, you want to hold at any one time. Your liquidity preferences will impact the type of investments you choose or whether you want to invest at all.

What are my goals?

If you're trying to build up enough money to cover the cost of your wedding, buy a car, or take a holiday, investing might not be the right option. For shorter-term goals like these, you're probably better off focusing on savings instead.

This is because the longer you can leave your money invested, the more time it has to grow and recover from any bad periods along the way.

So if you're setting aside money for something at least 5 years away – such as a child's education, retirement, or just more flexibility later in life – then investing may be the right path for you.

How do I feel about risk?

Fact: all investments involve risk. You're putting your money into something you believe will go up in value over time, but there are no hard and fast guarantees. You'll be exposed to the uncertainties of the markets, which means you could lose money on your investment.

With investing, risk and reward go hand in hand. As a general rule of thumb, higher-risk investments such as shares have the potential to yield higher rewards, and lower-risk investments tend to bring lower rewards. (A time deposit is an example of a very low-risk investment.)

What's important is to examine your risk tolerance level - how you feel about taking a risk with your money. Your risk appetite will also help to determine the types of products you'd choose to invest in.

How much can I set aside to start investing?

A common misconception people have when they're deciding whether to start investing or not is that they need a fortune to begin this journey.

Hong Kong's an expensive city, and you may feel you don't have that much money left after taking care of all your monthly expenses. But what many people don't realise is that they can often start investing with the little bit they do have left at the end of the month.

Sometimes, it doesn't require much to start setting aside some funds every month for investing - it could just be making some small lifestyle changes. If you have a habit of going to a cafe for your morning Americano just before work, that's HKD40 a day you're spending. In a month, that's HKD800. Brewing your own cuppa at home or having a coffee at your office pantry instead could save you this money, which you can then put towards your investments.

Remember: investing doesn't always require you to sink in a heavy amount of capital. There are quite a few inexpensive ways to get started. For instance, you're already contributing to your MPF fund and you can always choose to up your monthly contributions. This is a great starting point to think about how you want to allocate your money and the kind of risk you're willing to take, and you can start doing it right when you start working.

You can also start doing your own investing with as little as HKD100. Starting small and investing in a fund could be a good way to dip your toes in the water. Then you can watch what happens to your investment over a period of time – and increase the level of risk you'd be willing to take on later, if you want to.

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Takeaway investing tips for beginner investors

Keep these handy tips in mind as you start your investment journey. They're important principles that will stand you in good stead, even as you start getting more experienced as an investor.

  1. Investing is for the long term: You should be willing to leave your money invested for at least 5 years and not panic if it loses value at times during that period
  2. Risk and reward go hand in hand: The higher the potential rewards on offer, the higher the risk of losses
  3. You don't need to be a subject matter expert before you start: Investing in a fund that is handled by a professional fund manager can be a good place to begin. You don't need to be an investment expert adept at reading the market or having done extensive background research on companies and stocks
  4. Diversification is key: Riding on a single investment can be risky, as investments can fluctuate severely without warning. Spreading your money across multiple investments puts you at lower risk of large losses if the market takes a sudden downturn.
  5. Start as early as you can: Once you've got your finances in order, remember that the sooner you start investing, the better. That way, your money has more time to grow.

1 Hong Kong inflation rate 1982-2021, MacroTrends

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