How do we allocate our (excess) money?
1. If we need the money next year, it should be in Cash.
Well, we do not want our down payment for our house or other important commitment to evaporate or stuck in the stock market, in the event of a crash. We need to find a high interest fixed deposit for temporary storage for that money.
2. If we need the money in the next one to five years, or are approaching retirement; it should be in relatively safe investments.
Whether we need to pay for the kid's university fees or the retirement income that we need for the not so distant future, we need to reduce exposure to stocks and invest into safer investments, such as treasury bills, fixed deposits, government or corporate bonds. Here, T-bills have the lowest yield, while corporate bonds have the highest yield. However, the returns and risks also go hand in hand, and corporate bonds correspondingly have the highest risk.
If possible, it is better to invest into individual bonds rather than bond funds. The advantage of individual bond is that we know exactly what we will get back when the bond matured. While bond funds don't technically mature and we do not know how much our investments are worth when we need the money. In the event of a market crash, the bond fund could depreciate quite a bit too. It could greatly inconvenient us if it happens right when we need the money.
3. Any excess money that we do not need for more than 5 years, it can be invested in stocks
In the long run, returns from stocks will beat all other kinds of investment and when doing correctly, will beat the inflation rate and accumulate our wealth.
Whether investing in blue chips, dividend stocks, growth stocks or penny stocks; or mixture of the classes of the aforementioned stocks, diversification is a MUST. Nobody is perfect and inevitably, we will pick some "loser" stocks on our investment journey. Diversification is the "insurance" that these few losers will not affect the whole portfolio badly.
It is also important the you know your own risk appetite and risk tolerance level to prepare for the volatility of the stock market. We will definitely see bull runs and bear runs on our investment journey. It would be bad for your health if you lose sleep when your portfolio take a hit in bear run when even the bluest of the blue chips fall significantly. It may be alright if you lose a couple of night's sleep, but what if it is an extended bear run? On the other hand, it would be bad for your wealth if you sell your stocks cheaply and run away during such bear runs.
For a young investor who has decades of investing horizon, he can allocate all excess cash into stocks, which will generate the biggest returns for him in the long run. He could reduce the stocks exposure near his retirement, because he would has shorter time frame for stock recovery in event of a market crash. He also need more protection for his retirement fund.
Well, we do not want our down payment for our house or other important commitment to evaporate or stuck in the stock market, in the event of a crash. We need to find a high interest fixed deposit for temporary storage for that money.
2. If we need the money in the next one to five years, or are approaching retirement; it should be in relatively safe investments.
Whether we need to pay for the kid's university fees or the retirement income that we need for the not so distant future, we need to reduce exposure to stocks and invest into safer investments, such as treasury bills, fixed deposits, government or corporate bonds. Here, T-bills have the lowest yield, while corporate bonds have the highest yield. However, the returns and risks also go hand in hand, and corporate bonds correspondingly have the highest risk.
If possible, it is better to invest into individual bonds rather than bond funds. The advantage of individual bond is that we know exactly what we will get back when the bond matured. While bond funds don't technically mature and we do not know how much our investments are worth when we need the money. In the event of a market crash, the bond fund could depreciate quite a bit too. It could greatly inconvenient us if it happens right when we need the money.
3. Any excess money that we do not need for more than 5 years, it can be invested in stocks
In the long run, returns from stocks will beat all other kinds of investment and when doing correctly, will beat the inflation rate and accumulate our wealth.
Whether investing in blue chips, dividend stocks, growth stocks or penny stocks; or mixture of the classes of the aforementioned stocks, diversification is a MUST. Nobody is perfect and inevitably, we will pick some "loser" stocks on our investment journey. Diversification is the "insurance" that these few losers will not affect the whole portfolio badly.
It is also important the you know your own risk appetite and risk tolerance level to prepare for the volatility of the stock market. We will definitely see bull runs and bear runs on our investment journey. It would be bad for your health if you lose sleep when your portfolio take a hit in bear run when even the bluest of the blue chips fall significantly. It may be alright if you lose a couple of night's sleep, but what if it is an extended bear run? On the other hand, it would be bad for your wealth if you sell your stocks cheaply and run away during such bear runs.
For a young investor who has decades of investing horizon, he can allocate all excess cash into stocks, which will generate the biggest returns for him in the long run. He could reduce the stocks exposure near his retirement, because he would has shorter time frame for stock recovery in event of a market crash. He also need more protection for his retirement fund.
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