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Thursday 1 March 2012

Economy: Money Tips # 6 - 10

6. Know the difference between effective and nominal interest rates. Normally, banks will quote you a nominal interest rate when lending you money, but a higher, effective interest rate when you invest money. The nominal interest rate is the simple rate. The effective rate is calculated by compounding the interest earned or charged. 

7. Check whether the interest you are being paid is credited monthly, quarterly or annually. Say you invest Rm10 000 for 10 years. If you receive interest at 10 percent credited annually, you will get a total return of Rm25 937. If it is credited monthly, you will receive Rm27 070. 

8. How do you decide whether you should invest directly in shares? Simple. If you haven’t got the time to learn about stock markets, to follow the progress of companies or to track your portfolio, rather invest in unit trust funds and/or life assurance endowment policies that have shares as their underlying investments. 

9. If you do invest directly in shares, your two most important considerations should be ensuring that you have a properly diversified selection of shares across the stock market sectors to reduce risk, and regularly rebalancing your portfolio. When a share rises in price, you should consider selling some, but not all, of these shares, so that you make a profit, but your overall portfolio remains proportionally the same as it was when you started. By doing this, you’ll be able to reap further profits if the share price continues to rise. 

10. If an investment product is too complicated to understand, avoid it. It does not mean you are stupid. It simply means that the product provider and/or financial adviser are trying to baffle you.

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