Don’t just invest your money, optimise it

IN this money-driven world, the need to invest is absolutely undeniable.

The unstable economy combined with rising inflation and the implementation of the goods and services tax is affecting our cost of living in unpredictable ways. At this rate, if we do not invest, we run the risk of having to work our entire lives.

Investing allows us an opportunity to grow our wealth at compounded rates, thus multiplying our money within a shorter period of time. Take a look at the multi-billionaires of today – they did not exactly make their wealth by earning monthly paycheques.

Nevertheless, when we invest, we also inadvertently expose ourselves to the risk of making investment losses. These cases are not unheard of. We’ve all come by stories of investments that are deemed to be “perfectly good” by analysts and salespersons, only to drop like rocks, costing investors their capital or worse, their entire life savings.

Take for example, the unexpected collapse of financial juggernaut Lehman Brothers which eventually pulled the entire global economy into a tailspin; or the notorious Madoff ponzi scheme that left investors wary of even the most reputable and well-regulated institutions; or the 2007-2008 financial crisis which caused unit trust funds to lose 30%-40% of their value.

More recently, the investors of oil and gas stocks were hit badly by the recent crude oil downturn, causing them to lose up to 50% of their capital. The list goes on and on.

Alas, investment misfortunes are not limited to just stocks and unit trusts.

In the case of gold investment company, Geneva Malaysia Sdn Bhd, some 1,065 gold investors are presently embroiled in a lawsuit with the company for breach of contract involving RM146mil in gold products and monies owed to them.

You may have also heard of stories of property investors aiming to make a quick buck by flipping properties, only to be caught off-guard by not being able to rent or sell the properties for profit as planned.

Even the most experienced investors are not completely “bullet proof” from committing investment blunders.

By his own admission, Warren Buffett, the greatest investor of our time, shared in an open letter to his investors, two of his biggest business and investment mistakes, one of which he claims cost him and his investors US$100bil when he bought ailing Berkshire Hathaway. He called the actions that led up to his purchase of Berkshire a “monumentally stupid decision.”

In order to learn from these investment mistakes, we must first understand the risks and rewards of investing well.

The simple science of investing dictates that you are essentially aiming for maximisation of your return of investment (ROI). As such, in a best case scenario, investing will increase your net worth significantly and substantially. This is perfect, if you have done all the right things and had picked a winner.

However, what if the reverse happens? Depending on the size of the capital invested, you could suffer a major loss to your net worth and be further away from achieving financial freedom. Chart 1 illustrates the best and worst-case scenario when you invest money.