Chapter 2 Prime Strategies to Manage Wealth

Which instrument is suitable for ââÅ¡¬ÃƒÆ’…how many year does it takes?ââÅ¡¬ target !

1. First, Set the Goal

If there is no target, then it cannot work

First thing to do before learning to invest is to set ââÅ¡¬ÃƒÆ’…personal goal = target amountââÅ¡¬. The reason is because in the principle, investment is a financial instrument for ââÅ¡¬ÃƒÆ’…long term targetââÅ¡¬.

If there is thought ââÅ¡¬ÃƒÆ’…I want to invest so the fund can grow 2 or 3 times in short periodââÅ¡¬, the real-estate or mutual fund investment are not recommended. Mutual funds are intended for those who want ââÅ¡¬ÃƒÆ’…investing carefully over a long period of timeââÅ¡¬.

There are 2 important points for long term investment.

? If possible, do it as early as possible.

? Set goal.

When we are doing investment, what many people forget is the second point, which is setting up goal.

For example, in marathon the speed or pace can be set because there is a goal. If there is no goal in marathon, then the ideal speed cannot be determined.

In the other hand, before starting investment, the goal need to be set beforehand. How much is needed? For what kind of target? After how many years? Those questions are important to think before. For people who still unsure and just think ââÅ¡¬ÃƒÆ’…I want to grow the moneyââÅ¡¬, for starting letââÅ¡¬ÃƒÆ’¢Ã…¾¢s try to set personal goal first.

By setting goal, we can figure out from investment point of view which investment that can achieve the target effectively.

Ther is no capital guarantee in investing!

2. Decide Fund Amount for Investing

The bigger the capital, the bigger the result

In investment, the bigger the capital then the investment result is also bigger.

For example, if we can invest our fund for Rp. Rp.100.000.000,- for period of 20 years with interest rate on 3%, then the interest yield is around Rp.80.000.0000, but with the same investment but on Rp 10.000.000,- then the interest yield is Rp.8.000.000-. Despite investing in same interest rate with same time period, the end result varies depending on the capital. This way, how much fund we invest have direct impact on investment result.

However, what must be keep in mind is ââÅ¡¬ÃƒÆ’…investment does not have capital guaranteeââÅ¡¬. Different with bank, in investment there is a chance for capital loss. The bigger the fund, the bigger the potential loss. And also when investing over a long period, there is a time when it up, but also there is a time when it down. Because of that we need to manage these fluctuating situations.

Because of this, there are two requirements in investing in mutual fund, which are:

• Money that is not used (idle money)
• Surplus money

Let us understand how much money than can be used for your personal investment. This is not advised for those who in condition ââÅ¡¬ÃƒÆ’…barely have any money left every monthââÅ¡¬.

Fortunately, this does not need a lot of money. The benefit of mutual fund investment is it can be started by small amount. For those who want to start investing for Rp.100.000- per month, donââÅ¡¬ÃƒÆ’¢Ã…¾¢t hesitate to start investing.

The fund keep snowballing

3. Growing Fund with the Power of Compound Interest

 The longer the period, the bigger the result

For now, letââÅ¡¬ÃƒÆ’¢Ã…¾¢s study about the power of compound interest.

  Just like the graph below, if investing for Rp 100.000.000-, in a period of 30 years with interest rate 3% annually, there is a gap between yield based on simple interest and compound interest.

If investing with compound interest, the fund will snowballing. Because of that, the interest yield is getting higher, the longer the investment time, the bigger the result. In mutual fund with long term investment in mind, never forget about the power of compound interest.

Variation in management fee and redemption fee in mutual fund can affect the investment result

4. DonââÅ¡¬ÃƒÆ’¢Ã…¾¢t Just Shrug off the Cost!

Cost is a trap in mutual fund

When learning about mutual fund, one of the most important thing is Cost. Although many people donââÅ¡¬ÃƒÆ’¢Ã…¾¢t think it is important, but we shouldnââÅ¡¬ÃƒÆ’¢Ã…¾¢t take it lightly.

There are two main costs in mutual fund, the subscription fee and management fee. Subscription fee is paid when subscribing or joining a mutual fund, management fee is fee that is paid annually. Especially for management fee, because the fee is automatically taken from investment profit, the awareness for the fee is relatively lacking.

For example, if there are investments in conditions like bellow, which one will you chose?

?Investment yield rate 5%, management fee 3%

?Investment yield rate 4%, management fee 1.5%

In these conditions, if doing Rp. 1.000.000 investment for 20 years, then the results are differ for Rp. 150.000 with detail: ?Rp. 1.490.000 ,?Rp. 1.640.000. Hence even if the yield is big, the actual yield is lower because of higher cost.

Even if there is only 1% difference, the investment result can be much different. What is the difference between two fee with 1% difference with same yield?

?Investment yield rate 5%, management fee 2%

?Investment yield rate 5%, management fee 1%

In this condition if doing Rp. 1.000.000 investment for 20 years, the difference is Rp. 380.000, with detail : ?Rp. 1.810.000 ,?Rp. 2.190.000.

For long term investment, even 0.1% can make a huge difference. When buying mutual fund, take a close look on the fee.

Result of compound interest! Decrease risk! Decrease cost!

5. Mutual Funds are Profitable Long-term Investment

 3 benefits of long-term investment

Mutual Fund investment is not short-term trading, but investment product with long-term mindset. Tge benefits of long-term ownership are:

?Resulting in compound interest

With long-term investment, the result will take account of compound interest of devident, accumulation of interest, etc.

?Lower the Risk (of price range movement)

Like the picture bellow, if maintaining a mutual fund for 5 years and 10 years, then it is shown that the risk of the price movement range is lowered. NAV is fluctuating everyday, but if maintain it over a long period of time, the average price and movement range are lowered. Allowing us to get stable investment.

?Cost fee becoming lower

This is a well hidden feature, but long term ownership have effect in decreasing management fee that is spend during liquidation, subscription, etc. For example, if the management fee is 3% for one year investment period, and subscription cost is 3%, then in 2 year it become 1.5% then in 3 year become 1%. The cost is less affecting the longer the period.

This way, the longer we invest in mutual fund, the more benefits we get. If we only want to invest in mutual fund for short period like 1-2 years, we benefits cannot be enjoyed.

In mutual fund investment, keep in mind the phrase ââÅ¡¬ÃƒÆ’…time is your allyââÅ¡¬. We donââÅ¡¬ÃƒÆ’¢Ã…¾¢t live forever. So the duration when we can investing is limited. The earlier we start, the better.

 Started form Rp. 100.000

 6. Big Return by Investing Little-by-Little

Can control the investment fund

As stated repeatedly here, the advantage of mutual fund investment is ââÅ¡¬ÃƒÆ’…can be started with small amount of fundââÅ¡¬.

The benefits of able to start with small amount doesnââÅ¡¬ÃƒÆ’¢Ã…¾¢t necessarily means ââÅ¡¬ÃƒÆ’…can invest without moneyââÅ¡¬. The main benefit is you can invest by dividing the timing and adjust it with your investment style like additional investment, averaging technique, etc.

For instance, you can do a planned investment by determining the amount of the investment, like ââÅ¡¬ÃƒÆ’…investing Rp.1.000.000 every month when still 20 years old, then Rp.3.000.000 when 30 years oldââÅ¡¬, and also ââÅ¡¬ÃƒÆ’…adding additional investment Rp. 10.000.000 when getting bonusââÅ¡¬, etc.

This kind is system can be seen as unique to mutual fund as it is difficult or almost impossible to be used on stock investment or others.

Recommending beginners to invest in routinely

7. Suppressing the Risk of Investing Little-by-Little

Dividing timing by investing little-by-little

A lot of people are confused on choosing the right moment to start investing. They often ask ââÅ¡¬ÃƒÆ’…when is the right moment for me to invest?ââÅ¡¬

It is always better if we buy when the price is low and sell when the price is high, but predicting the right moment is very difficult. People always wonder whether this is the moment to buy or sell, but no one knows the future.

If we want to minimize the risk based on buying timing, the ââÅ¡¬ÃƒÆ’…timing diversificationââÅ¡¬ is an important aspect. For doing timing diversification, the method is to buy in small amount repeoatedly over a period of time instead of buying on large amount in one time. The investment technique that optimum with this repeated buy is dollar-cost-averaging technique or in Japan might be known as Tsumitate investment.

Investing little-by-little with fixed amount every month can be a profitable investment

8. Tsumitate Investment or also known as ââÅ¡¬ÃƒÆ’…Dollar cost averagingââÅ¡¬ (DCA)

Optimal investment technique for investing little-by-little

LetââÅ¡¬ÃƒÆ’¢Ã…¾¢s take a look at technique called ââÅ¡¬ÃƒÆ’…Dollar cost averagingââÅ¡¬.

Dollar cost averaging (DCA) is an investment method that constantly buy a fixed amount of investment routinely and continuously when investing in a product with fluctuating price.

By doing investment with fixed amount routinely, the automatically can apply the strategy ââÅ¡¬ÃƒÆ’…buy less when price is high, buy more when the price is lowââÅ¡¬. Also buying when the price is high can avoid risk of not buying when the price is actually low, this can increase investment yield.

Besides of that, because this is a contunuous buying mechanism without any judgment of the market specifically, then it doesnââÅ¡¬ÃƒÆ’¢Ã…¾¢t take much time. This is also related to investorsââÅ¡¬ÃƒÆ’¢Ã…¾¢ worry of ââÅ¡¬ÃƒÆ’…when is the right timing to buy.

If you already read until here, you have understood the concept so far right? Mutual funds are the best way to implement tsumitate investment or DCA. Applying this technique on stock investment or other is pretty difficult. Although you might think that there are not much difference on the amount of money invested or unit bought in DCA investment method where the money investment is fixed, it is better to use fixed amount of money rather than fixed amount of units. This is because it is possible for average buying price to get lower.