How to determine your investment strategy?
You know you cannot keep your money in the bank because the saving interest rate is too low. You know that you need to invest. But what to invest?
To determine the right investment strategy, you need to determine your investment objective. There are only 2 objectives when it comes to investment. You either invest for capital gain or invest for cash flow. If you are investing for capital gain, you need to buy low sell high. If you invest for cash flow, then you need to understand the predictability of cash flow.
Human is normally greedy. We all want capital gain and cash flow. However, the truth is most of the investments will achieve better for either one of these objectives. For example, if you are investing for capital gain, you may consider buying landed property or small cap stock. The potential for capital appreciation for landed property is better than apartment. Likewise, the potential for capital appreciation is better for small cap stock than big cap stock. However, in terms of cash flow, you should be aware that landed property fetches lesser rental yield. Same goes to small cap stock, because the company is still growing, the profit will be retained for future growth and the dividend pay-out will be lower.
Now, how do you know whether you need capital gain or cash flow investment strategy? You need to understand your financial goal first, you can access to this video to understand how to calculate your retirement goal.
Cash flow investment strategy is only suitable if you need constant income. The total investment yield for cash flow investment is more stable but lower compared to capital gain investment. Hence, this strategy is mostly required when you are retiring soon or when your retirement lump sum goal is or almost achieved.
If the gap between your current net worth and your retirement sum is huge, then you need to focus more on capital gain so that you can close up the gap faster.
What are the investments you can consider for capital gain? You can buy undervalued foreign equities and small cap stocks which have potential for capital appreciation. You may also go for undervalued properties or landed property for better capital gain potential.
When you select capital gain investments, be prepared to stay patient to wait for the capital appreciation. This type of investment will have very little cash flow during the investment period. Ensure you have sufficient active income to sustain while waiting.
For cash flow investment, you are aiming to get more passive income when you are investing. Then, you need to check the cash flow yield. Make sure the yield is more than the bank saving interest rate. This type of investment is not for withdrawal. Be prepared to keep the capital in such investments for long term to get the income that you want. Examples of this type of investment are bonds, rental properties and dividend funds or stocks.
Understand your investment needs better so that you know which investment strategy is more suitable for you. Let’s grow your wealth better! Watch the Youtube video here on this topic.
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