Investments Archives | Page 30 of 38

Not Investing Because It’s ‘Risky’?

Too often we hear of people or even peers who have not begun to explore the idea of investing because they’ve been told that it is ‘risky’. Wait, did you say ‘they’ve been told’? Does that mean that they never even tried their hands on it and come to the false conclusion that investing is risky? Sure, investing entails risk because there’s the possibility of losing money doing it. But do you really know what ‘risky’ mean? Does not losing necessarily equate to ‘no risk’? No.

True risk lies behind what is seldom seen. Having only one source of income is a really big risk. While the money is coming in from your monthly salary, it’s easy to feel safe and secure because you can settle your credit card debts, mortgages and bills. However, it’s this very framed up mindset, that money only comes from working (1 Income Source) that blinds us. We become so comfortable with receiving one paycheck per month that we fail to see the possibility of having multiple paychecks coming in.

Have you ever thought about “What happens if I got fired?” With layoffs becoming more and more common these days, it is a very real question. Is it simply just a time to go look for a new job to fix that broken stream of income? Or is it time to think about a greater issue at hand? This is the kind of risk I’m talking about, unforeseen risks. Who knows if another massive labour cut happens and you’re one of the unlucky victim? What would you do without 3-6 months of income? How are you going to pay for the bills now? Now, is having a job truly risk-free?

Consider this, what if you had a job while your investments were paying you cash dividends (Sharing profits with shareholders). Now you would have multiple streams of income, depending on how many different companies that pay out dividends consistently you have invested in. Even if you had lost your job, you still have a couple of income streams that does not even require you to do anything to make sure that money keeps coming in. This in turn creates a buffer for if in the unfortunate event you lose your job temporarily. On the even brighter side, you could have income from your job while your investments continue to pour even more income into your bank account!

Is investment still ‘risky’ when you see this side of the picture? Wouldn’t the risk of having only one source of income be even greater?

Just because you don’t know how to invest, doesn’t mean you can’t learn how to invest! There are many articles here on MoneyDigest and on the internet that can teach you how to invest. Just remember, which is more risky? Having only one source of income or spending some time to learn how create multiple sources of income.

Everything You Need To Grasp About Compound Interest

As an investor, the longer you keep your money on the account, the more you will make out of it. Elevation of your wealth each year is possible because of COMPOUND INTEREST.

With Compound Interest, you will not only earn interest on your principal deposit but also on any interest that is credited to your account. It helps your money to grow at an accelerating rate!

To better understand the concept, here is an illustration:

Say you invested S$50,000 to an account with a 5% interest per year. With the gains you made from compounding, how much would you earn in 3 years?

Year 1: S$50,000+ (S$50,000 x 5%) = S$52,500
Year 2: S$52,500+ (S$52,500 x 5%) = S$55,125
Year 3: S$55,125+ (S$55,125 x 5%) = S$57,881.25

Compounding adds up faster than you may think. As you can see, you earned S$7,881.25 in just three years!

Aside from its definition, here are some things you really need to know about Compound Interest:

1. TIME IS OF THE ESSENCE

The longer you keep your money invested, the greater the rate at which your initial investment produces returns. This is why it is advantageous if you started young. And if your “younger years” passed, the next best thing is to start now.

Calculate the possibilities of your accumulated wealth through a Compound Interest Calculator that is available here.

2. PEOPLE FROM ALL WALKS OF LIFE CAN BENEFIT FROM IT

You do not need to be as financially literate as the people on Wall Street or as rich as Bill Gates because almost any investment will earn a Compound Interest if you leave your account untouched. The same principle and rules apply whether you invested S$1,000 or S$1,000,000.

3. TAKE CALCULATED RISKS

Yes! Compounding is powerful in almost all the circumstances but, you must not fall into the temptation of getting higher returns through higher risks. Unless you know what you are doing, taking on the higher risks can potentially lead to a chain of bad decisions from now until you retire. It is important to take well-informed and calculated risks to prevent destroying everything you once built.

4. PATIENCE IS TRULY IMPORTANT

Compound Interest requires you to sacrifice today to obtain its benefits tomorrow. It only works if you allotted time and effort in growing investment. The results may seem small at first but, you must persevere.

Image Credits: pixabay.com (License: CC0 Public Domain)

Certainly, its future rewards are greater than the sacrifice.

Sources: 1 , 2 , & 3

How to navigate the tough economic climate with systematic stock-picking skills

Recent news has been dominated by political and economic slowdown issues in both emerging and developed countries and it shows little sign of abatement. Global and local investors are increasingly feeling queasy about the financial market performances that has inevitably led to spikes in volatility.

While uncertain economic times may take a typical investor on a rough ride, it presents a cornucopia of gainful opportunities for the learned eye. Indeed, as detailed in the diagram below, the key is to align your risk appetite with the right investment strategies sorted by industry type and size. Next, an insightful analysis would also consider company-specific attributes that could potentially act as a lever or a damper on the stock returns.

It is also crucial to understand and consistently apply the Singapore context to the specific industry and company under review. For example, as shown below, it is paradoxical to categorise the real estate industry as non-cyclical. However, given Singapore’s major land constraint, strategic location, extensive infrastructure and favourable policies for trade and investment, real estate would be significantly less prone to cyclical influences than our counterparts.

A step-by-step basic investment guide

What should you invest in? Equities or Bonds?

What should you invest in? Equities or Bonds?

The answer depends on two major factors: how young/ old you currently are, and the riskiness of your job. To elaborate, it is good to understand some basic concepts:

There are basically two types of investment products, bonds and equities.

Company issue bonds, which is borrowings with a fixed rate of return (interest rate). Bond holders do not own the company, so do not get to vote in company decisions.
Company sell shares, which is equity to shareholders. Shareholders own parts of the company, so they get to vote in company decisions, as such, shareholders also undertake the risk the company takes.

Basically, it shows the simplified balance sheet of companies.

The revenue that company earns goes back to pay business expenses (eg. employee salaries, tax, etc), before paying for the interest owed to bondholders, leaving what is left as the profit.

The company can then choose to distribute part of the profit as dividends.

So in the 3 scenarios, they look like:

Normal economy – Revenue minus business expenses minus interests for bonds equals profit.
Boom – Revenue increases by quite a bit, minus business expenses which is more or less fixed, might increase a little bit, minus interests payable to bondholders which is the same, and leaves quite a lot of profit. Shareholders then get to share in the profit.
Recession – Revenue dropped by a lot, minus business expenses which is roughly the same, maybe drop a bit only because you can retrench some staff, but can’t retrench everyone, minus interests payable to bondholders which is the same, leaves very little as profit.

In the event the company goes bankrupt, it will have to pay the bondholders first, because in bonds, they owe money to bondholders. After that, any money left then goes on to paying the shareholders.

In the case of stocks and shares, share cycles typically lasts 8 to 10 years.

Total earning potential is the sum of your earnings from today until the day you retire. Given the above, which total earning potential scenario is higher?

When you first started work fresh out of university or
After working for some years and possibly earning at your peak?

The answer is obviously the former, where you first started your first job in your twenties. Why is this so?

Imagine that you retire tomorrow, your total earning potential will then be your salary today + your salary tomorrow.

This means when you first started work, you have a long earning timeframe until you potentially retire. While counterintuitively, when you are possibly earning at your peak after several years of working experience, you may not have a high total earning potential.

Diversification is then spreading your investments over a number of assets to reduce risk.

What this means is:

Age wise

When you are young – you behave like a bond (because if you get fired when you are young, it is easier to find a new job because your salary is still low, and got more time to accumulate wealth)
- So when you are young (bonds) – you should buy equities
When you are old – you behave like a share (because more risky, less time to accumulate wealth and see through the stock market cycle)
- So when you are old (equities) – you should buy bonds

Occupation wise

When you are in a low risk job (eg. government sector, teacher although I know thatnowadays the “iron rice bowl” is not as low risk as it usedto be) – you behave like a bond (less chance to get fired)
- So when you are in a low risk job (bonds) – you should buy equities
When you are in a high risk job (eg. private sector, banking) – you behave like an equity (more chance to get fired, but got potential to earn a lot in good times)
- So when you are in a high risk job (equity) – you should buy bonds

Image Credits: pixabay.com (License: CC0 Public Domain)

So there you have it. Depending on where you are in your career life cycle, and whether your career behaves like equity or bond, invest accordingly to achieve the desired diversification effect.

“Work hard, save up to invest, retire young.”

Do You Really Have What It Takes To Be A Trader?

Do you want to trade as a career but, you do not know where to start? How about you get to know yourself first?

Begin the journey by examining your relationship with money and life. Do you view life as a daily struggle or as an endless opportunity? Have you lost money recently through your daily activities and are you hoping that the financial markets will treat you better?

Wherever you are right now and whatever your belief system is, your personality will influence your perspective on your profits and losses. This is why it is important to include self-worth into the mix. Analyze your strengths and weaknesses and examine whether you have what it takes.

Marc Pearlman shared his observations based on his experiences as a professional trader and money manager. According to him, here are the tangible qualities that aid in success at day trading:

1. POURING HARD WORK

It is no surprise that hard work tops the list. Since trading is a skill, it needs to be developed through time. A lot of people view trading as a hobby or as a substitute to gambling however, this should not be the case. People only end up bad when they treat financial markets as casinos and not as businesses.

2. PRACTICING DISCIPLINE

Marc compared trading to going to the gym. For example, people may have been frequenting the gym and yet have no noticeable changes in a year. He says it is be due to the lack of discipline and goal-setting, which I agree on. Trading is no different. You must have discipline and concise strategy to reach your goal!

3. KNOWLEDGE IN PROBABILITIES

Making money through trading does not mean that you have to be perfect all the time by making right calculations. Instead, the key is to lose as little as possible when your call is wrong and gain as much as possible when your call is right.

4. LETTING GO OF THE DESIRE TO BE ALWAYS RIGHT

If you would rather be right than make money then, trading may not be for you. In trading, you cannot be right all the time! Furthermore, some may even be wrong more than they are right.

Image Credits: pixabay.com (License: CC0 Public Domain)

To accompany these desirable qualities, here is a website that I found that can help you test your skills in Mathematics, Logical Sequence, and more. You may adjust the difficulty by choosing either Easy, Medium, or Hard.

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