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Here’s 1 Thing You Really Need To Know Before You Start Investing

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Sometimes, we focus too much on the act of investing itself that we forget why we are investing.

Of course, we all invest to make money – but there’s also a higher reason behind why we want to make that money. And forgetting about that higher reason might lead us to unnecessary mistakes if our portfolio’s not aligned with our true objectives.

Here’s what I mean. Imagine you’re a young married working class professional in your late twenties who has just started investing. Your monthly cash needs are easily covered by your salary and you generally have no need to look for additional sources of income. Thus, your purpose when it comes to investing might be to meet really long term goals, such as having enough to retire comfortably or having enough to pay for your children’s tertiary education.

In finding suitable investments, however, you model your portfolio after that of say, your parents’. Given that both of them are retired and have to live off their savings and investment income, high-yielding and stable blue chips like StarHub Ltd. (SGX: CC3) and Singapore Press Holdings Limited (SGX: T39) might hypothetically be the type of shares which populates their portfolio.

But given the very different circumstances you and your parents are in, does it make sense to model your own portfolio after your parents’?

Not every great investment is suitable for you

Although an investment might have a great chance of turning in a positive outcome, it might still not necessarily be suitable for you.

Continuing from the imaginary example above, investing your entire portfolio in high-yielding shares might not be the best option for you. Since you’ve just started work for only a few years, it’s likely your investment portfolio is small – this makes reinvesting dividends impractical. And given that the reinvestment of dividends can be a very powerful force in boosting long-term share market returns, it might not make sense for you, as a new investor, to chase high-yielding shares.

Instead, it might be more suitable for you (again, hypothetically as per the imagined scenario described earlier) to concentrate on companies which have a strong track record of growth and which retain most of their earnings to fund growth. In that way, you can benefit from the company compounding its own economic value over time.

Foolish Summary

So maybe it is time for all of us to look at our current portfolio and ask ourselves: What am I investing for? Is it for income? Is it for growth? Does my portfolio fit my ultimate objective? Once you are able to answer these questions, you might then be able to have investments which are more aligned to your goals and needs.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.