The relationship between risk and reward is one of the “golden rules” of investing: The risk you must take is proportional to the desired reward.
The risk (and reward) associated with various investments can vary greatly; It is critical that you are aware of the potential dangers associated with any investment you make.
There is no investment that is risk-free, and your bank deposits are no different. First, despite the fact that bank deposits in Singapore are rightfully regarded as extremely secure, banks in other nations have failed in the past and continue to fail. Moreover, the average inflation rate from January to November 2010 was 2.66 percent, while the highest interest rate on Singapore dollar deposits up to $10,000 was 0.375 percent. Simply leaving your savings in the bank was costing you money.
There are a plethora of investment types, or “asset classes,” available today. You are already familiar with some, like bank deposits, stocks (shares), and unit trusts, but you should be aware of several others. Some of the most typical include:
Investment-Linked Products (ILPs) include bank deposits, shares, unit trusts, exchange-traded funds, gold, and investment-linked products. The fact that ILP offers life insurance is its main advantage.
2 A unit trust is a pool of money that is professionally managed in accordance with a specific, long-term management objective. For instance, a unit trust might try to provide a balance between high returns and diversification by investing in well-known businesses all over the world. The fact that unit trusts do not require you to pay brokers’ commissions is the primary benefit.
3 There are numerous types of Exchange-Traded Funds (ETFs): ETFs that hold or track the performance of a basket of stocks, such as Singapore or emerging economies, are one example. commodity ETFs that hold or track the price of a single commodity or a group of commodities (such as metals and silver); and currency ETFs that track a single major currency or a group of major currencies (like the Euro). There are two main benefits to ETFs: On stock exchanges like the SGX, they trade like shares and typically come with very low management fees.
The primary distinction between ETFs and Unit Trusts is that ETFs are assets that are publicly traded, whereas Unit Trusts are assets that are privately traded, allowing you to buy and sell them at any time during market hours.
4 In this context, “gold” refers to gold savings accounts, certificates of ownership, and gold bullion. However, keep in mind that there are numerous other ways to invest in gold, such as through gold ETFs and Unit Trusts; and shares in companies that mine gold.
With the advent of the Internet and online brokers, there are now so many options for investing that even a novice investor with $5,000 can find several options that meet her goals, risk tolerance, and time horizon.
Basically, diversification is trying to lower risk by investing in a variety of companies, industries, and countries (and, as your financial knowledge and wealth grow, in various “asset classes” like cash, stocks, ETFs, commodities like gold and silver, etc.). Your Investment Portfolio is the name given to this collection of investments.
Diversification is important because similar investments tend to behave similarly during times of crisis. The Singapore stock market crashes of late 2008/early 2009, during the US “Subprime” crisis, and the “Asian Financial Crisis” of 1997, when the price of a lot of stocks fell, are two of the best examples from recent history. Investing in a variety of stocks to diversify wouldn’t have been very helpful to you in these circumstances.
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