SIAS's 3 Dimensions of Investing:
Roadmap for Your Investment Journey
By David Gerald, President/CEO SIAS

Against all beliefs, investing can be a daunting and treacherous journey. Over the last 20 years, an investor who had invested in the S&P500 index would have made an average return of 5.4% but would have experienced a volatility (measured by standard deviation) of about 14.8%. However, if the investor had started investing 10 years ago, he would have suffered an annualized loss of 3.9% and would have experienced approximately the same amount of risk. The loss deepens if he had invested one year ago to 52% and he would have experienced a volatility of almost 22%. The situation would, on the other hand, be different if the investor had sold his investment in Oct 2007.

         


Investing is not just about picking the best stock or figuring out how to time the market perfectly; it is about fitting the best investment portfolio to the investor. But before starting the journey, an investor must first answer a list of questions. These questions include:

1. What risk level should the investor undertake?
2. Is the return sufficiently high to compensate for the risk?
3. How should the investor mix the different asset class?
4. Should the investor invest beyond the local market?
5. What is the value of the asset?
6. Should the investor employ leverage?

However, these questions cannot be answered if the investor has not identified one important facet – himself.

1. Know Yourself.
2. Know the Products
3. Know the Strategies

How can the 3-Dimensions help you?

i. Know yourself:

In Sun Tze's Art of War, Sun Tze said "know yourself and know others and you will not lose any battles". Knowing and understanding yourself is the first important step in your investment journey. What must you know about yourself?

1. "Your financial health and position – such as your income, expenses, assets and liabilities.
2. Your investment objective – such as retirement, future purchases, child education.
3. Your risk budget – the level of risk you can take given your financial health.
4. Your risk preference – the level of risk you are willing to take.
5. Other essential information – such as expected obligations due to aging parents.

Knowing yourself first will essentially allow you to then answer the six questions listed above. The personal financial planning industry has developed a comprehensive set of tools – consisting of questionnaires and personal financial ratios – to help you understand yourself. The tool is known as the "Financial Needs Analysis".

Financial Needs Analysis could be conducted either by the investor himself or with the assistance of a professional financial planner. It will be helpful if you could seek the opinion of a recognized financial advisor to help you know yourself. You must be honest when inputting information into these tools to acquire proper advice. No doctors can diagnose your health condition if you choose to stay silent or lie about your condition. However, if you find that the financial advisor is not acting in your best interests when conducting the financial needs analysis, you can choose to end the process without needing to purchase any products.

ii. Know your products:

After knowing yourself, you should then proceed to find out the investment tools and products available in the market. This will help you know the tool available to help you achieve your investment objective. Products can basically be classified into a few categories, such as:

1. Investment time horizon
2. Liquid or illiquid
3. Risk level
4. Complexity level
5. Listed and unlisted
6. Symmetric or Asymmetric returns

The rule of investing is simple – there is no free lunch. Investments compensate investors for undertaking two factors:

1. deferring their enjoyment for consumption to a later date and
2. undertaking risk (or uncertainty).

Therefore, it is logical that returns increase as investors increase their investment horizon and also the level of risk. If an investment is too good to be true because it offers a higher rate of return for a short investment horizon with almost no risk, it is probably too good to be true.

iii. Know Your Strategies

Once you know yourself and the tool that can help you achieve your investment objective, you must then learn the strategies. Investment strategies help you put together the tools available in the market to achieve certain risk-return combination. Investment strategies can generally contain three factors:

SIAS Research, a subsidiary of SIAS, has developed a three-pronged investment strategy that is aligned to SIAS's 3 dimensions of investing roadmap.


Consequence of Not Knowing the 3 Dimensions

There are consequences of not knowing the 3 Dimensions. If you know yourself and the products but don't know the strategies, you face this risk of earning lower returns because you did not apply the appropriate strategies.

If you know yourself and know the strategies but don't know the products, naturally, you would have missed the opportunity to earn the return from that product.

Finally, if you know the products and the strategies but do not know yourself, you will undertake an investment portfolio that does not match your risk budget.

Know Yourself	Know the Products	Know the Strategies	Consequence
			Returns are not optimized
			Investment opportunities missed
			Investment risk does not fit the investor’s budget

So, use this roadmap when you start planning your investment your journey. It will help you ensure a safer journey ahead.

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