WHEN people talk about investment, it will always be about how to make thousands in the future from their initial capital fund. Frequently, an investment is associated with the time period. Even more importantly, an investment requires sacrifices as investment funds need to be locked up for years. Another definition of an investment is deferring current consumption in exchange for future consumption.
It is always a big challenge to start an investment fund. Investors need to have the courage and be more determined about their investment decisions.
For instance, opting to cut down all the entertainment, food, and clothing expenses
is a difficult and somewhat painful decision. Rarely do people react positively towards those decisions. Many are still reluctant to change their spending habits now for their future investment.
According to a recent Department of Statistics report, life expectancy at birth for both females and males has increased. People are expected to live longer now. Therefore, they need to have sufficient retirement funds before reaching retirement age to enable them to live a comfortable life in many years to come.
It is also essential to plan retirement funds where the amount is similar or exceeds the previous monthly income that they used to enjoy with the intention to maintain their standard of living. In this modern era, the older generation cannot depend solely on their children to support them financially in their old age. They not only have to be prepared physically, mentally, and socially, but also financially.
I would like to share a simple method of investment that people can easily apply in their investment strategy without the need to use complicated formulas. The key to an investor’s success is strengthening your investment selection. It is also vital
for investors to understand
and recognise their risk tolerance.
Carefully setting your financial goals and identifying your own risk tolerance will allow you to invest comfortably and confidently in the financial system. Structured investment selection will lead to proper investment strategies and equip investors during
future uncertainties or challenges throughout the investment period. One rule of investment that investors can follow is by applying the Rule of 72 in their investment selection.
The Rule of 72 was invented by Albert Einstein, German-born theoretical physicist. He considered it the most dominant power on earth. The Rule of 72 relates to the years required for an investment to double by dividing the interest rate into 72.
For a start, it is advisable to put aside at least 10 per cent of your monthly income for investment, specifically for a retirement fund. Assuming your monthly income is RM10,000. Therefore, the amount of investment will be 10 per cent of the RM10,000, which equals to RM1,000.
As we are applying the Rule of 72, this RM1,000 will double up to RM2,000 in nine years assuming that the compounded rate is 8 per cent yearly. However, if we substitute the compounded rate to 1 per cent yearly, the investment will take a longer period of up to 72 years.
Similarly, the Rule of 72 can also be applied in managing your expenses, taking into account the inflation or interest rate. For example, if the inflation rate rises to 3 per cent, your money will lose half its value in 24 years, and if your university tuition fee increases 2 per cent yearly, the fee will double in 36 years.
In conclusion, the Rule of 72 will work effectively and be able to strengthen the investment if the investor is willing to invest in a diversified portfolio, and dares to look forward to a better compounded interest rate offered in the financial system.
Shella Georgina Beatrice is a lecturer from the School of Business, Faculty of Business, Design and Arts at Swinburne University of Technology Sarawak Campus.