Ben Fok

Do not take investment lightly — one mistake can set you back for a long time.

WEALTH ACCUMULATION — THE NUMBER ONE REASON WE INVEST

Instrument

Rate of Return

Accumulated

Keep under pillow

0.0%

$240,000

CPF OA

2.5%

$411,709

STI

6.0%

$1 million

S&P 500

12.0%

$5.9 million

If we were given these three investment choices, the obvious choice would be the S&P 500, which provides the best returns.

Risk is the possibility of losing money on our investments. The CPF OA rate of 2.5 per cent is an almost unchanging rate. It may move up a little, or go down a little, but it will never hit negative, which means that we can’t possibly lose money.

Investing in the S&P 500 produces winners and losers, and along with that, a sense of unpredictability.

We can see that looking at returns without considering risk is clearly a major mistake for any investor. But we are sure you will agree that if you want to seek out the best returns, you will have to tolerate some risk.

What history tells us is that there is a positive relationship between risk and return, and we can assign relative risk levels to the three investment choices as follows:

TABLE 1.3. RELATIVE RISK LEVELS

Investment Choice

Risk Level

CPF OA

Low

STI

Medium to High

S&P 500 Index

High

BIG MISTAKES CAN SET YOU BACK — PERMANENTLY

An investor needs to do very few things right as long as he or she avoids big mistakes.

Even smart people can make silly mistakes when it comes to investing.