Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC.

Mid-Week Comment Jan 27: Margin calls, S-chip woes drag down STI

Tags: China Milk Products Group | China Printg & Dyeing Hldg | Delong Holdings | Ferrochina | Genting Singapore Plc | Ks Energy Services | New Lakeside Holdings | Sunshine Holdings
Written by Goola Warden
Thursday, 28 January 2010 09:16

ON WEDNESDAY, ‘forced selling’ by local traders on margin calls hit the market and drove the benchmark Straits Times Index down a further 34 points to close at 2,706.26. In all, the STI has fallen 187 points since last Wednesday, and 227 points from its Jan 11 high of 2,933.

Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC. Its share price is down almost 20% since the start of the year. According to a report by DBS Group Research, there could be a potential share overhang from the “mandatory conversion of remaining $321 million Convertible Bonds 2 at 95 cents (338 million shares) on Feb 9”.

Separately, KS Energy Services, the offshore oil & gas and marine services and support company run by Indonesian millionaire Kris Wiluan, announced it plans to issue $50 million in principal amount of 3% convertible bonds due 2015 at an issue price of 89.34% of the principal. The $44.67 million raised will be used to refinance existing debts. The initial conversion price is $1.60 per share, representing a 30% premium to its last traded price of $1.23. KS Energy may also undertake a further issue of convertible bonds worth up to $57 million if required.

According to OCBC Investment Research, the funds are likely to be used because bondholders of the previous tranche of convertible bonds issued in 2007 might opt for early redemption. The bonds issued to Stark funds were at a conversion price of $4.05. “Early redemption would require a yield to maturity of 5.5% for Stark, and we therefore estimate KS Energy would need about $113 million ready,” OCBC says. The report believes that KS Energy could come to the market with new shares “at any time, given the capital-intensive nature of its business” and has a “hold” recommendation.

Convertible bonds have been a poisoned chalice of sorts for some stocks, particularly S-chips. On Monday, the South China Morning Post said six of 11 S-chips which sold convertible bonds between 2005 and 2008 have insufficient funds to repay their convertible bondholders. The S-chips named were China Milk Products Group, steel coil maker Delong Holdings, property developer Sunshine Holdings, China Printing & Dyeing Holding, waste treatment services provider Sino-Environment Technology Group and steel group FerroChina.

Meanwhile, a local broker report says S-chip New Lakeside Holdings, the producer of apple concentrate, could be insolvent, following the company’s decision to make an RMB22.75 million ($4.7 million) provision for its liability to Bank of China. This may also force the other two principal bankers China Construction Bank and ICBC to demand immediate repayment of RMB14.5 million and RMB10 million. As a result of these claims, the company’s liabilities will exceed its assets.

To be sure, Singapore stocks weren’t the only ones being sold down. Markets everywhere in Asia reeled, largely because of China’s credit-tightening measures. According to a Citigroup Research report dated Jan 25, Asian fund inflows were down 94% week-on-week to US$29 million ($40.7 million) last week. Month-to-date, net inflows to Asian funds barely rose above US$670 million, the report says. This is much smaller than average inflows of US$2.1 billion in the month of January between 2004 and 2007. Asian fund inflows were dampened by China tightening and the strong dollar, the report says.

CHART VIEW
The market is becoming increasingly “oversold” based on short-term oscillators. For the STI, the 21-day RSI is at 34% and the 14-day RSI at 24%. These are at their lowest levels since March last year. Support appears in the 2,700 area which was tested several times before the index eventually broke out. On the flip side, the STI is below its still rising 100-day moving average now at 2,748 and the 200-day moving average at 2,539. With support appearing soon, and indicators — including the five-day stochastics — at extreme lows, the market should attempt a rebound at resistance level to 2,748. A stronger upmove would only develop after a series of positive divergences, which would take four to five weeks to develop.

http://www.theedgesingapore.com/blog-heads/goola-warden/12036-mid-week-comment-jan-27-margin-calls-s-chip-woes-drag-down-sti.html

Rubber glove companies enjoy pricing power and steadily rising sales

Judging from the capacity expansion by rubber glove companies, it appears that larger glove companies like Top Glove, Supermax and Sempermed (Thailand) have more moderate expansion plans as a percentage of existing capacity, while smaller ones like Latexx and Adventa have more aggressive expansion plans and are likely to show higher earnings growth in 2010. 

An oversupply of rubber gloves is unlikely in 2010 but could be a worry in 2011 when more capacity comes onstream. Assuming that the 150 billion-a-year medical glove market grows by 8% a year, an additional capacity of 12 billion gloves will be required per year.  Rubber glove companies have been able to pass on higher costs arising from rising latex prices, with Top Glove increasing prices again in January 2010. 

Nevertheless, producers of nitrile gloves may now enjoy better margins as the cost advantage that latex gloves enjoy over nitrile gloves may have narrowed as latex prices have risen faster than nitrile prices.  Ratings of Malaysian rubber glove companies are still cheaper than those of Ansell, SSL International and the Malaysian market.

The Edge
1.2.2010
By Choong Khuat Hock


Comments:

The whole glove industry is growing.  Due to capacity expansion and their smaller sizes, the smaller glove companies are expected to show faster earnings growth than the bigger glove companies.

The industry business is still resilient.  Profit margin is either maintained or improving.  Glove companies are still able to pass the cost to the customers.  How long will this last?

This industry is highly competitive.  The business is driven by volume and price.  When capacity to supply outstrips demand, those companies with durable competitive advantage are expected to survive.  Those low cost producers will be the big winners and leaders.  Those companies that automate their production with good quality control will probably be able to lower their costs per unit through increasing productivity.  It is possible that those leveraging on low human labour costs now with no or few plans for increasing automation of the manufacturing processes, may eventually lose out to the former in the future both in terms of quality, productivity and costs.

The Only Three Questions That Count: Investing by Knowing What Others Don't

Investing is far more complex than that.

The idea is to get us to think more deeply.

The three questions are:

• What do you believe that is actually false? Test the received wisdom to see if it is really true. 
• What can you fathom that others find unfathomable? Look for unusual areas of competitive advantage that you have that are possessed by few. 
• What the heck is my brain doing to blindside me now? Your emotions will often lead you astray: Look for opportunity amid fear; look for shelter amid wild abandon.

Competitive advantage in investing is an elusive thing.

• The clever idea that you might discover is just one journal article away from an academic toiling in obscurity, but will go to a hedge fund two years from now.
• Patterns that work in one market should work in most markets. If your discovery seems to work in most places, it might work well, until it is discovered and used heavily.

Fisher uses E/P relative to bond yields to try to estimate whether markets are rich or cheap.

Now, in the intermediate-run, most things that people are scared about don’t affect the market much.

• Government deficits? Seem to be a positive for stocks in the short run.
• Trade deficit? Little effect on stocks.
• Weak dollar? Little effect.

This book debunks a number of common worries.

Ref:
The Only Three Questions That Count: Investing by Knowing What Others Don’t
(Fisher Investments Press)
 http://seekingalpha.com/article/182970-fisher-s-the-only-three-questions-that-count?source=hp_wc

Importance of Financial Education

Flip-flopping from gloom and doom back to boom... this is fun!

Watch all the media types get whiplash flip-flopping from gloom and doom back to boom - wheeeee, this is fun!

http://seekingalpha.com/article/185412-thank-gdp-it-s-friday?source=article_sb_picks

Limiting portfolio risk to extreme "black swan" events.

I am not looking for a systematic way to call market tops or bubbles, I don’t think they exist.

I am far more interested in finding ways to limit the exposure on the downside of a portfolio due to “black swan” events. The expression made famous by Nicholas Taleeb in his book The Black Swan. Such events would be defined as

• unlikely events with disastrous circumstances,
• bursting of bubbles, or
• other low probability events that could have disastrous consequences on a portfolio.

Also,  such thing as a perfect hedge that protects the downside and retains the potential for upside gains… is either non-existing or very rare.

http://seekingalpha.com/article/185531-in-search-of-the-illusive-black-swan-hedge-one-idea-worth-trying

Be careful when playing momentum – the trend may appear to be your friend, but can quickly turn into a foe

Momentum – The trend is not always your friend

Posted by indianmutualfund

Have you ever thought why most stock tips you receive are about buying a stock that has done well recently, a recent winner? Are your brokers and friends great stock pickers who pick stocks that do well, or is it just momentum – picking stocks AFTER they have done well – at work? With no offense to anybody’s skills, it’s probably the latter.

Momentum is India’s favourite market strategy. Most stock picks and market recommendations, whether they come from a broker’s desk or a cocktail party, when looked at in any detail, point to momentum. What does that mean? Quite simply, it means betting on things that have done well recently – whether it is an individual stock, a particular sector or the market as a whole. A classic recent example – everyone wants to buy steel stocks because they have done well, everyone wants to sell telecom stocks because they have done badly. Buy winners, sell losers, it’s as simple as that.

Indians are not the only ones who understand or love momentum, and there is no magic behind it. Momentum is a time-tested globally known investment strategy with its roots in behavioural finance. When good news comes out, people under react because they are not sure, and the stock price doesn’t rise enough. The stock has room to go, and as more good news comes out, people overreact, driving the stock price up further. Similarly, on the downside, as bad news comes out, people over react to bad news, and in despair run for an exit, leading to a further correction. The tendency to overreact to bad news and under react to good news is timeless and inherent in human nature, and as long as it works, momentum trading will continue to work.

In fact, momentum has historically been even more powerful in India, than other global markets, and is one of the best performing strategies over the last 15 years. The most basic indicators have made for very favourable trading strategies. What makes it even more popular is that momentum is one of the easiest things to do – it takes very little to get the past prices of stocks and figure out which ones are doing well. You don’t need to know anything about the stock or the business to trade momentum – you could be following the price of bananas for all it matters.

Moreover, for a broker or an individual, momentum is a professional and socially safe strategy. You’re always following the trend, always selling what is doing well, and that’s a pretty easy sale to make. You always sound right, and who doesn’t like that? Compare this to value investing – after all the work involved in understanding a company’s inherent value and financials, you are the one rooting for an undervalued firm whose stock price has been beaten down. Even tougher, you’re running down a company that has done well because it is overvalued, even though everyone else loves it. It’s a pretty unpopular place to be in and a tough sale to make to a client.

Unfortunately, for all its ease and apparent money making abilities, momentum can revert pretty quickly, and when it does, it gets ugly. No trend sustains itself forever, definitely not in the short to medium term, and when a trend reverts, it is painful being a momentum trader. Think of 2007. For the three year bull run, markets were doing well, and every trader was bullish – momentum did well and every investor felt they had discovered a gold mine…until 2008 struck. The upward trend reverted, the market crashed and momentum crashed with it, and quickly. Momentum traders saw gains made over three years quickly erode as markets took a turn.

My favourite story about the dangers of playing momentum is Religare AGILE, a mutual fund that claimed to be a quant fund, but is actually just playing momentum. AGILE launched when the tide just turned and momentum was having its worse run. In a year when the markets were down 60%, AGILE bled much more. A period of downward momentum followed and AGILE did fine, but come May 2009, the downward trend reverted. The markets rallied nearly 90%, momentum strategies suffered, and AGILE returned less than 50%. AGILE’s poor performance, incidentally, has nothing to do with being a quant fund – many quants have done well over this period – it is simply playing momentum.

Cut to the last quarter of 2009 – another great period for momentum as the markets have had an upward trend, and to no surprise, AGILE has done superbly, as have other funds that have played the same trick. What will happen to them when the trend reverts, however, is the question?

Should you not play momentum or invest in a momentum fund? In general, yes, investing in a concentrated strategy is a bad idea – investments should be diversified across investment styles. If you do have to play momentum, do it in a conservative way with moderate risk. Most of all don’t be fooled by a manager’s great returns over a period – he may just be playing momentum. Check out his returns when the trend reverts.

Be careful when playing momentum – following the trend may appear to be your friend, but can quickly turn into a foe you had never bargained for.

Source: http://www.moneycontrol.com/news/mf-experts/momentum-–-the-trend-is-not-always-your-friend_438780.html

Aim for durable, long-term outperformance in your stock market investing

Long term investors in the stock market will know that most go through hot and cold streaks.

 

More importantly, investors should aim for durable, long-term outperformance.

 

However, many investors either

• lose in equity investment or
• end up in a no profit-no loss situation.

 

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down.

Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors.

 

Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

 

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market.

 

Only the ‘smart investors’ survive the ups and downs in the market and make pots of money.

Relative quality often a matter of time

Luukko: Relative quality often a matter of time

Published On Sat Jan 30 2010

By Rudy Luukko
Mutual Funds Columnist

As any investing textbook will tell you, good stocks with superior fundamentals will eventually outperform bad stocks. What you also need to realize – as a direct holder of stocks or as a fund investor – is that stock markets don't always reward good stocks.

Paradoxically, stocks whose characteristics are exactly the opposite of what the textbooks advise you to look for are sometimes the biggest winners. At least over shorter periods.

This is what happened after the 2008-09 bear market, says fund manager James O'Shaughnessy, who is based in Stamford, Conn., and manages about $3.4 billion for RBC Asset Management Inc.

A practitioner of enhanced indexing (he calls his methodology strategy indexing), O'Shaughnessy employs quantitative screening techniques to try to beat market benchmarks. The criteria vary for the various mandates, but among his key factors are stock-price momentum, stock price to book value and dividend yield.

During the past two years of mostly bearish markets, O'Shaughnessy's screening methods flopped. All six of his RBC fund mandates with at least two years of history lagged in their peer groups. Five performed in the dreaded fourth quartile, meaning the bottom 25 per cent of fund rankings.

As O'Shaughnessy explains, no stock characteristics will consistently protect portfolios in down markets. His funds also suffered because the types of stocks he held weren't the ones that rebounded most strongly after the bear-market low of March 2009.

Instead, the market recovery was led by stocks that had been "priced for extinction," meaning they had fallen the most on fears that the issuing companies' very survival was threatened.

Historically, the shorter the holding period, the less likely it is O'Shaughnessy's funds will have outperformed their market benchmarks.

For example, RBC O'Shaughnessy Canadian Equity outperformed the S&P/TSX over all rolling 10-year periods dating back to its inception in late 1997. But it did so in just over half of all the three-year periods. And over all the one-year periods, the fund beat the index only 37 per cent of the time.

Of the three oldest funds, RBC O'Shaughnessy Canadian Equity and RBC O'Shaughnessy U.S. Value both rank in the top quartile of their peer groups over 10 years, and RBC O'Shaughnessy U.S. Growth performed in the second quartile. "We take solace from the fact that, over long periods of time, we can have the odds on our side," O'Shaughnessy told me.

More evidence that the ugliest-looking stocks will sometimes be market darlings comes from the so-called "Dangerous Portfolio," a demonstration model created by the CPMS division of Morningstar Canada. It's designed to illustrate the perils of choosing overpriced, debt-laden stocks with deteriorating earnings.

Yet in 2009, this portfolio returned 85.3 per cent, more than double the 35.1 per cent of the S&P/TSX Composite Total Return Index. Over 10 years, however, the Dangerous Portfolio has been the hypothetical wealth destroyer it was designed to be, losing an annualized 16.8 per cent, while the index gained an average 5.7 per cent.

Since you can do so badly over time with a portfolio of lousy stocks, it follows that there are merits in screening techniques that seek to identify the good ones. But as we've seen both with hypothetical portfolios and with real-life funds such as those managed by O'Shaughnessy, this is a game of probabilities. The only certainty is that no stock-picking system will work all the time.

rudy.luukko@morningstar.com
http://www.thestar.com/business/article/757949--luukko-relative-quality-often-a-matter-of-time

Investing requires continuous learning from the market.

Lessons to learn from markets

Ashish Pai / New Delhi January 31, 2010, 0:19 IST

There is money to be made. But remember the basics.

Also Read

- Simple strategies for small investors
- The top 10 business bestsellers
- Be curious about companies
- News you should not use
- Time your stock sale
- The momentum psychology


The best way to learn your investment lesson is by investing in equities. Each occasion in the market teaches new lessons, which will empower you to achieve your ultimate goal of building wealth.

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down. Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors. They either lose in equity investment or end up in a no profit-no loss situation. Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market. Only the ‘smart investors’ survive the ups and downs in the market and make pots of money. Here are some lessons required to be learnt from the market.

Evaluate when you lose money in the market. Do not just shrug and say, “I am not going to invest any more!”. Investing does not mean making no mistakes, it means learning from experience. All of us made mistakes, when we started - such as going by tips from broker or buying penny stocks. As time passed by, we learnt that by not following the herd, we may have limited gains but our capital will be protected.

Be patient when investing in the market. Investors who show the right kind of patience make the most from the stocks they invest in.

• You need to be patient by not booking losses at the slightest market provocation or
• by not selling stocks before they have reached an optimum price.
• Also, be patient by not panicking when in a market downslide or
• by not buying stocks which you know are good but currently priced higher.

Look for opportunities to invest. There will be many opportunities to grab in the market, such as

• FII selling,
• global downturn,
• credit crisis,
• currency crisis, etc.

Each such occasion is to be looked at as an opportunity. ‘Smart investors’ will fill their pockets with the crème de la crème stocks in the equity market on such occassions. For example, blue-chip stocks like BHEL, HDFC, NTPC and ITC were quoting low prices in the first quarter of last calendar year due to the global credit crisis. It was an opportunity to buy these stocks.

Look for quality advice before investing. Do not follow the herd mentality. Always remember, quality stock picking will help you generate substantial wealth over a period of time. The quality picks can be large-cap, such as SBI, HDFC Bank and Tata Power or mid-caps such as Petronet LNG, Power Grid and Marico.

Learn to invest systematically. Getting into a systematic investment plan (SIP) in mutual funds or directly in an equity portfolio is the preferred mode of investing. At the end of five to 10 years, this portfolio is likely to appreciate by leaps and bounds. If the market is in a bullish phase, the money may even double in less than three years.

Learn the importance of diversification. You can better your returns and reduce risks by diversifying your portfolio. You can diversify across asset classes like gold, commodity futures, property, etc, as well.

A profit booking policy is advisable. The profit booking policy can be based on expectations from equities. Suppose an investor has put money in a stock and it rises by 100 per cent in a year, he may book profits either partially or fully. One strategy could be to book profits in a way that the initial investment is recovered and the profit portion continues to be invested in the stock.

Assess risks before investing in the market. Many a time, we invest in a particular stock or fund without assessing the risks involved with the stock. For example, sectors such as real estate or metals are riskier as compared to FMCG or power. If you don’t have a high risk taking ability, do not go for risky stocks or sectors.

Do not borrow to invest. In a sliding market, such investors are most impacted, as they have to offload stocks due to margin calls or liquidity issues.

Do not chase momentum stocks. In most cases, investors enter such stocks at the peak and are stuck with these for a long period or have to sell at a loss. Some of the momentum stocks in the recent past were Unitech, DLF, Jet Airways, Reliance Industrial Infrastructure and Jai Corp. The prices of such stocks reach a peak on sustained buying and then slide, roller-coaster, in a few sessions.

Conclusion :
Investing requires continuous learning from the market. Like driving a car, investment is more of learning practically and hands on. It requires discipline. When you are driving a car, what speed to drive and which lane to drive in are decided by the driver. Similarly, in case of investment, you must know how much to invest, where to do so and when to sell.

The best is to have a disciplined approach, combined with an investment philosophy. Some of the great investors like Warren Buffet or George Soros have been successful as they have a disciplined way of investing. There is no easy way to make money. All of us have to learn lessons in investing in the same market and in the same way. Each time, investors are put to different tests. Only the learned investors will succeed. Be a ‘smart’ investor.

In brief :
* Learn from your past experience
* Have a strategy to invest
* Iinvest systematically
* Look at your liquidity requirements
* Diversification is advisable
* You will need discipline and patience

The writer is a freelancer


http://www.business-standard.com/india/news/lessons-to-learnmarkets/384131/

Congratulations, You're an Investor!

Congratulations, You're an Investor!
By Dayana Yochim
January 29, 2010 


During this monthlong Fiscal Fitness Boot Camp, we worked some money magic -- saving big bucks by scrutinizing our major (and even some minor) expenses.

What's the point? Sure, padding the bank account is good. Freeing up cash to more quickly pay down high-interest debt is even better.

But once the basics are taken care of -- once that debt is but a distant memory, and you've got a decent emergency cash cushion for life's just-in-case events -- the very best thing you can do with your money is to make it grow. In other words: You've mastered the art of saving. Now it's time to become a bona-fide investor.

Channel your inner Warren Buffett
The truth is that every one of us is already an investor. Every dollar decision we make is an investment, whether for long-term gain (retirement savings), short-term safety (emergency fund), or immediate pleasure (mocha latte -- hey, I'm not one to judge). (This mind-set -- "Treat Every Dollar as an Investment" -- is such an important part of successful money management that we've made it a key part of our Motley Fool Magna Carta.)

However, today we're going to venture into the world of traditional investing. If you complete today's homework, you'll snag the most handsome payoff of this entire series -- adding tens of thousands of dollars to your bottom line.

Don't start mentally spending that money just yet. Investing is a long-term exercise. The kind of savings we're talking about will accumulate over years -- decades, even. But it's not going to happen magically on its own. So let's get started.

Your first investment
As scary as the stock market has been as of late, it's still the best place for your long-term savings. (Note the emphasis on long-term. We're talking about money you do not need to touch for five to 10 years, depending on your tolerance for risk.) With that in mind, when it comes to traditional investing -- as in IRAs, 401(k)s, stocks, bonds, mutual funds, gold doubloons -- start with the basics and you're 90% of the way there.

Last year, we recommended three stocks -- Costco (Nasdaq: COST), Paychex (Nasdaq: PAYX), and National Oilwell Varco (NYSE: NOV) -- to our Fiscal Fitness graduates. But if you don't want to jump into individual stocks, that doesn't mean you shouldn't invest.

One of the easiest ways to get started investing is to sign up for a 401(k), 403(b), or 457 plan at work, if your employer offers one. The money is deducted from your paycheck and sent straight to your 401(k), 403(b), or 457, before income taxes are taken out.

Another reason to do so? Free money! Many employers add money to your account based on the amount that you sock away. Incredibly, however, many people don't take their employers up on the offer. That's essentially dissing an instant, guaranteed return on their money. For example, save $5,000 with a 25% employer match, and you suddenly have $6,250. (Whatever you do, don't make one of these six common 401(k) blunders!)

Once you've maxed out your 401(k) -- or if you don't have one at your place of employment -- it's time to move on to phase 2 of building a portfolio.

How to invest $50, $500, and $5,000-plus
First, determine how much you have to invest. Depending on how much money you've freed up to invest, some investment battle plans make more sense than others. Here's advice on how to proceed with $50, $500, and $5,000-plus.

How to invest $50:Thanks to the miracle of compound interest, even small sums can add up to big nest eggs over time. (Get a load of these charts to see what I mean.) If you're just starting out, the very best thing you can do is to commit to investing on a regular basis.

One of the best ways to invest small amounts of money regularly and cheaply is through a DRP -- dividend reinvestment plans. They and their cousins, direct stock purchase plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents. They also allow you to reinvest dividends directly into more shares of stock. More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $50 at a time. Some plans even allow investments of as little as $20. Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

What to do with $500: With this amount of money your investment options open up. You've got enough money to meet many companies' minimum initial investment requirement to open an IRA (or even a taxable brokerage account). (Here are 10 ways to size up a broker.)

Mutual funds are a popular investment option for many investors. You'll want to consider whether to go with an index fund, which simply tracks a particular benchmark, or an actively managed fund. You may want to start with a large-cap-oriented fund, which will give you exposure to well-known companies like ExxonMobil (NYSE: XOM), AT&T (NYSE: T), and Procter & Gamble (NYSE: PG). But you can also buy funds in just about any category, from bonds and small-cap stocks to shares of international companies like Vale (NYSE: VALE).

Some funds require as little as $250 for you to invest (typically restricted to IRAs). After your initial investment, you can add as much money as you like, as frequently as you like -- and if you choose a no-load fund and purchase directly from the fund company, there won't be any commissions. For beginners, a high-quality mutual fund is a great portfolio building block.

How to manage a $5,000-plus portfolio: As you establish a decent-sized retirement kitty (yay, you!), diversification should be your aim. You want to spread your money around -- allocate your assets -- owning both mutual funds and stocks to cushion yourself from stock market belly flops. (Here's the Fool's rules for asset allocation, including a handy chart that'll help you determine how much of your money should be invested in stocks.)

At this savings level, again, the power of making regular investments over time is very strong.

If you start with $1,000 at age 25 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have more than $500,000 set aside. Yup. The key is to make sure that your costs of investing (including brokerage commissions, mutual fund management fees, etc.) add up to less than 2% of your account's overall worth. That's money that you've worked hard to save -- so make sure it's not slipping away in dribs and drabs!

Finally, let's end with the secret to investment success ...

Save more and invest more
End of story. Sounds dull, but if you get serious about those two things, you will turn your entire financial future around.

Let's say your Fiscal Fitness Boot Camp frees up 3% of your salary to invest this year. If you sock away $1,500 (3% of a $50,000 salary) and earn an 8% average annual return over five years (for a grand total of around $2,200), you'll bank $700 more than if you hadn't become an investor. Commit to the 3% savings goal for the next five years (for a total of $7,500 invested), and your portfolio will blossom to more than $11,000 -- that's an extra $3,500 in nest egg padding.

What's the point?
At the beginning of this article, I asked, "What's the point?" The example above just puts a dollar figure on the benefits of investing.

But the real point of this entire exercise is what that money represents.

• For some of you, the savings we've found during this month means freedom from the shackles of debt.
• For others, it means peace of mind, being financially prepared should you lose your job or if the water heater goes on the fritz.
• And for a few folks out there, this month of becoming fiscally aware will pave the way to an early retirement, the ability to put a down payment on a house in 10 years, or even just a sense of control and stability that you've never felt before.

So what's the point of saving and investing for you? Do share in the comments area below.

http://www.fool.com/investing/general/2010/01/29/congratulations-youre-an-investor.aspx

Reviewing the basics of interest-bearing investments

To have a good understanding of interest-bearing investments, learn and know the followings.

The risks of interest-bearing investments, for example:

• inflation,
• interest rate cycles and
• dubious borrowers with poor credit ratings.

The advantages of investing in this asset class, particularly

• the interest income on which you can rely.

Some of the main interest-bearing investments in the market.  These include: 

• cash,
• money market funds,
• bonds,
• participation mortgage bonds and
• voluntary purchased term annuities.

You have to know about two new market places other than the stock market: 

• the money market, where short-term interest-bearing secuities are traded, and
• the bond market, where longer-term interest-bearing securites such as bonds are traded.

Mistakes to avoid when investing in interest-bearing instruments

Interest-bearing investments may be relatively stress-free, but they too have their pitfalls.  Watch out for the following:

• Do not accept the first interest rate you are offered.  Compare interest rates, negotiate where possible and find out more about fixed versus fluctuating interest rates and the term of fixed-interest investments.
• Do not think interest-bearing investments are safe, risk-free havens.  Remember the impact of inflation.
• Do not forget about interest rate risk.  When interest rates increase, bond prices will decrease, resulting in a loss on your investment.  The longer the term of the bonds, the greater the drop in the market price.
• Do not invest in bonds without understanding the terms of the bonds and the interest rate environment.  Invest in well-known and reputable bonds rather than in unknown corporate bonds.

Other interesting interest-bearing investments: Mortgage Bonds and Term Annuities

Today a myriad of unit trusts invest in interest-bearing investments.  These include:

• money market funds,
• income funds, and,
• bond funds.

Mortgage Bonds

One of the most attractive interest-bearing investments with a fixed capital value is participation mortgage bonds. 

• Here you invest in units in large mortgage loans that are granted against the security of a first-class physical asset, for example, commercial, industrial or other property. 
• Your capital is guaranteed and you earn interest at a competitive rate that can be variable or fixed. 
• A great advantge is that a participation bond becomes quite liquid after the initial five-year period when you can still enjoy the interest income and withdraw on only three months' notice.
• (These mortgage bonds caused the subprime credit crisis in 2007-2008 in US).

Term Annuity

A voluntary purchased term annuity is another important investment product from which you can earn a regular income.  It is simply the exchange of a cash lump sum for income, which is paid annually, half-yearly, quarterly or in monthly instalments over a specified period (minimum five years). 

• This basically means that your original capital is refunded by way of regular instalments together with interest earned on the investment. 
• You will therefore not get back any capital at the end of the period as in the case of fixed deposit. 
• A voluntary term annuity can be purchased at any life office and is in essence an insurance contract. 
• The interest or annuity rate is fixed for the term of the contract, but varies from institution to institution. 
• This investment product also offers a tax benefit, as you pay tax only on the interest part of your annuity.

More about another interest bearing investments: bonds

Bonds are fixed-income securities that governments and companies issue in order to borrow money.  They pay interest to you for that privilege. 

The maturity date is the date on which the full amount that was borrowed is returned to you .

The investment term is normally a fairly long period, say ten years or longer.

The coupon is the interest rate you receive. 

Bonds are traded on the capital market in the same way that equities are traded on the stock market.

Bonds are medium-risk investments because the interest rate cycle has a definite impact on the value of bonds. 

If you want to understand bonds, this is the most important thing to remember:  when interest rates fall, bond prices rise; when interest rates rise, bond prices fall. 

This is simply because the coupon on the bond is fixed, and the market value of the bond is adjusted to bring the coupon in line with the external interest rate. 

Bonds are a very important part of a well-diversified portfolio.  In difficult stock markets, bonds can provide a cushion to soften the blow.

Money market funds have become very popular alternative to bank deposit

A money market fund is a type of unit trust that invests in interest-bearing instruments issued by banks, government and companies when they want to borrow money.

These short-term instruments are

• traded on the money market, and
• have a maturity of less than 12 months.

Money market funds have major advantages in comparison with other cash investments.  For example:

• You gain access to money market instruments even though you invest only a small amount.
• The interest rate is higher than for a bank deposit, as you are part of a group that can bargain for the best wholesale rates.
• You can withdraw your money at any time, like a call deposit at a bank.
• Interest rate risk is largely eliminated because money market funds are allowed to invest only in instruments with an average term of not more than 90 days.

Units in a money market fund have a fixed value of $1, and the only changing aspect is the interest income an investor earns on that unit.

This income is capitalised, or reinvested, which means the investor earns interest on interest.

Money market funds are ideal

• for pensioners who must live on their interest income or
• for the creation of an emergency fund from which you can withdraw money at any time. 

Money market funds also provide useful parking for investors

• to limit the risk of an investment portfolio in uncertain times or
• to phase in their funds.

When you invest in a money market acount, you should know the difference between the nominal and effective rate. 

• The effective rate is the interest rate you will earn if your money is deposited for the whole year and all the interest is reinvested. 
• The nominal rate is lower because this is the rate you earn every month before any reinvestment of interest is taken into account.

The 'safe' option of cash

Cash has always been seen as a fairly safe investment, and our forefathers were quite happy to put their money under the mattress and leave it there.

Today we realise that you cannot just put your money away and forget about it, because inflation will erode its value.

If you want a stable income, a bank deposit is still a valuable investment option.

However, money market funds have become a very popular alternative.

The calmer waters of interest-bearing investments: their risks and rewards

The interest-bearing investments include:

• cash
• bonds
• the money market securities.

Compared to the roller-coaster ride of equities, interest-bearing investments are like a sea of tranquillity.

The focus of interest-bearing investments is not on the appreciation (increase) of the capital you have invested, but rather on the provision of a steady interest income - often at a fixed rate.

While shares offer you higher returns at a higher risk, interest-bearing investments offer you lower returns at a lower risk, making them a safe haven for many investors.

But this safe asset class is not safe from inflation. 

Interest-bearing investments often do not generate the kind of return that beats inflation, and it is very important to remember that interest income is taxable.  After taking tax into account, the return on interest-bearing investments often struggles to beat the inflation rate.

The reason for this is simple.  Interest-bearing investments are normally money you lend to a bank, government, company or other institution with the undertaking that this exact amount will be paid back after a period of time. 

In return for this, you earn interest.

Since you only get the same amount back after a couple of months or years, that amount is usually worth less as a result of inflation. 

Your only real benefit is the income that you receive.

Interest-bearing investments also hold other risks. 

• This asset class is subject to the ups and downs of the interest rate cycle.  As interest rates increase or decrease, your cash flow can be affected - unless you have a fixed interest rate.
• Furthermore, you should beware of institutions with credit risk.  A high interest rate is not everything:  you must also be sure that your capital will be paid back. 

The so-called junk bond market in America is well known as a market where companies with poor credit ratings offer exceptionally high interest rates.  Sometimes it is better to earn less interest, but know that your money is safe.

Interest-bearing investments do, however, play an important part in an investment portfolio.  Although inflation will still erode the capital value of your investment, these investments do have advantages, including:

• offering you a relatively safe and predictable income.
• offering you less risk and volatility than an investment in equities
• offering diversification in your portfolio in case stock markets collapse
• giving you instant access to cash when you need it.

Investment in Property

Property is one of the main asset classes, the first investment most people make, and usually their biggest asset. 

Investment in property offers the promise of

• an appreciation (or increase) in capital and
• a regular income in the form of rental payments. 

That means that property, like equities, can beat inflation over time.

But you must also be aware that the capital value of your property can depreciate (or decrease) over time, therefore property is a medium- to high-risk investment.

One of the advantages of investment in property is gearing or leverage.  This is the use of debt in the form of mortgage bond finance to 'leverage' you or help you to acquire an asset you would not otherwise be able to afford.

With a little financial help from your banking friends, you will, it is hoped, make a good capital gain on your investment one day.

There are different ways of investing in property. 

• On the one hand, you can simply own your own home in which you live. 
• On the other hand, you can own an investment portfolio of different properites with a view to earning a rental income or capital profit from them. 
• A third way to invest in property is through the stock market.

Your own home

An own home is often the biggest asset in one's investment portfolio. 

For most people, paying off their house takes up most of their earnings.  They are using their mortgage bond to leverage them, possibly with the hope of making a capital gain one day.

Paying off a mortgage on your own home is one of the best investments you can make, and a golden rule to remember is that you should pay off your mortgage bond before you start thinking about investing in other asset classes.

As an own home can be a medium- to high-risk investment,  you should be aware of the following dangers:

• Property is highly illiquid.  This means you do not have immediate access to the value of your property should you need cash (although you could use your mortgage bond facility), and if you decide to sell your house, there is no guarantee that you will be able to do so quickly.
• The value of your house is influenced by many factors over which you have no control, such as political factors and economic and interest rate cycles.

An investment portfolio of properties

Buying a property with a view to letting it and using the rental income to cover your mortgage bond payments (with the mortgage interest often tax-deductibe) while you benefit from the capital appreciation of the property sounds like a great investment strategy.  So why do not more people do it?

The reason is perhaps because there are so many pitfalls in propety investment.  Some of these are:

• Large amounts are required to invest in property.
• Properties need to be managed.  Difficulties include problems with tenants, payments on time, maintenance, etc.  and these must all be factored into your calculations.
• There is a high risk of bad timing in property investment.  Certainly, you can make substantial capital gains, but only if you buy and sell the property at the right time.

Property investing on the stock market

Property investing on the stock market gives the small investor the chance to invest in property in a more liquid way.  You can sell your investment without having to sell a physical property, and you gain access to the propety expertise and scale benefits of large projects.  There are three sectors in the stock market property division in which you can invest, namely:

• property companies,
• property loan stocks, and
• property unit trusts or REITS

You can buy shares or units directly in these entities that own a diversified range of properties.  Each of these will have a different risk profile depending on factors such as

• the age,
• location and
• type of property in which it invests.

These entities normally perform well in a falling interest rate environment, but, as with all property investments, are vulnerable to

• interest rate cycles and
• economic and political change. 

These investments can therefore be fairly volatile and are recommended only for investors with specialised knowledge. 



Additional notes:

The concept of gearing:  This can be explained by the following example.  Say you have put down a deposit of $200,000 to buy a property of $1 million.  Within two years, the property's value increases by 10% to $1.1 million.  This means you have actually used $200,000 to earn $100,000 (i.e. 50% return) with the help of your bank manager!

Beware of property gains tax:  This can reduce the attractiveness of investment property.  Property gains tax can take a significant chunk of your capital gain when you sell property and will make it more difficult for this investment to beat inflation.

Remember Diversification

Most investment plans should include a combination of the 4 major asset classes because of the benefit of diversification.

Diversification in this context means spreading your investment risk between the various asset classes. In other words, not putting all your eggs in one basket.

Investors who are prepared to hold a combination of equities, bonds and money market instruments stand a greater chance of higher returns over the long term than those who invest only in conservative investments such as cash.

By combining

• the growth potential of equities with
• the higher income of bonds and
• the stability of money market funds,

you are employing a sound strategy to control the balance of risk and reward in your portfolio and to ensure that your investments fit in with your

• time horizon,
• risk tolerance profile and
• investment objectives.

How do asset classes fit in with your profile?

From answering the 10 simple questions (reference below), your total score tells you more about yourself.  Three basic profiles emerged and helped set the necessary guidelines for your investment portfolio.

The three basic profiles and their respective investment objectives are:

• You cannot afford to make mistakes: Conservative investment objectives
• You are carefully weighing up your options: Prudent investment objectives
• You want to grow bigger and better: Aggressive investment objectives

Click here to find out what asset classes these respective investors should include in their portfolios.
http://spreadsheets.google.com/pub?key=t5u-KMcEYg81UlomoCgxU9A&output=html

Read also:

What money means to you? Answer 10 simple questions.

http://myinvestingnotes.blogspot.com/2010/01/what-money-means-to-you-answer-10.html

Understand what money means to you: Answer 10 simple questions : Sheet1

http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html

Equities - high risk

An investment in equities (shares or stocks) means that you have obtained part-ownership in the company whose shares you have bought.  Some companies are listed on a stock exchange, which means that your shares can be traded freely on that stock exchange.

Although equities are a high-risk asset class, they have the best chance of beating inflation over the longer term because of the inherent growth potential of the company in whch you have invested.

For that reason you should keep a SIGNIFICANT  portion of your portfolio in equities.  The basic rule is:  the longer the time until you retire, the more you should invest in equities.


How do I know how much of my portfolio should be in equities?

• Try this general rule of thumb:  multiply the number of years until you retire by two to get to the percentage of your assets that you should keep in equities. 
• For instance, you are 45 years old and have 20 years before retirement.  That means that you should invest 40% of your assets in equity.

Property - moderate to high risk

Property is often the biggest asset in a person's investment portfolio.

Property can keep up with inflation and can be a very effective way of gearing your investment.

This means that by using external financing you can increase the return on your investment.  Debt in the form of a mortgage bond can help you to acquire an asset - and a return on this asset - you would not otherwise be able to afford.

The risk of property, however, is moderate to high. 

Much depends on

• the location of the property and
• the political and economic environment.

One big drawback of this asset class is illiquidity:  the fact that you cannot sell property as quickly as investments in other asset classes. 

For that reason the safest option is to own your own home, but to leave property speculation (a potentially risky business) to the experts.

Bonds - moderate risk

Bonds or gilts can be defined as interest-bearing securities issued by governments or companies in order to borrow money.

In essence, it is an IOU, in which they promise to pay you, the lender,

• interest and
• to pay back your capital sum on a specific date.

This asset class offers a moderate risk. 

• The capital sum that you invest can fluctuate, while
• the interest payments can be higher than on cash.

Cash - low risk

Cash is one investment from which you can never hope to make a fortune, althoug it can safeguard you against losing one.

Cash investments, including bank deposits and money market accounts,

• offer you the assurance of a regular interest income and
• knowing your capital will not be subjected to huge external fluctuations.

But cash also carries risk.  There is no guarantee that your capital sum will be protected against inflation, as this investment does not have any inherent growth potential.

The 4 major asset classes: the building blocks of any investment plan

Any serious investor should have a basic knowledge of the 4 major asset classes and the risk inherent in each:

• Cash - low risk  (For Savings and Protection)
• Bonds - moderate risk (For Income)
• Property - moderate to high risk (For Growth and Income)
• Equities - high risk (For Growth)

Remember this fundamental rule:

The bigger the risk you take, the greater the possible reward or return (growth on capital) you can expect.

The safer your investment and the smaller the risk you take, the smaller the possibility of a great return.

Why do so many people invest themselves into bankruptcy?

Investment is simply the saving of money with the aim of making it grow.

The amount you invest is called your capital.  Investing is therefore the creation of more money through the use of capital.

The trick, of course, is finding the right assets in which to invest.

Why do so many people invest themselves into bankruptcy?

The answer is that they

• invest in dubious or risky products, or
• know too little about themselves and the product or asset classes in which they invest.

What money means to you? Answer 10 simple questions.

In order to really make your money work for you, it is important to try and get

• to know more about yourself and
• your relationship with money. 

Some "money psychology" should help you to deal with your financial affairs in a smart way.

To find out more about your investment orientation and your relationship with money, answer the 10 simple questions below as honestly as possible.  This will also help set the necessary guidelines for your investment portfolio.

Time horizon
Questions 1 - 5

Risk tolerance
Questions 6 - 8

Investment Objectives
Questions 9 - 10

http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html


Your total score tells you more about yourself.

Less than 10:  You cannot afford to make mistakes
Between 10 and 20:  You are carefully weighing up your options.
More than 20:  You want to grow bigger and better.

Investment Objectives

There are four major financial phases in life:

• a no-strings-attached youth,
• building a family,
• working towards retirement, and,
• retirement itself.

Each depends on how you view

• your lifestyle,
• your financial situation and
• your investment objectives. 

Identify where you are in the cycle and how it affects your financial goals.

Risk Tolerance

Time is not the only factor that affects the risk you take when you invest.

Your own tolerance of risk is an important factor.

Risk is the measurement of your willingness to see your investments shrink in the short-term, even though you know they will increase in the longer term. 

You need to have some idea of your level of risk tolerance.

Time Horizon

What are your major deadlines in life?

 How much time do you have to save and invest before you retire?

Your time horizon is very important when you invest, because compounding works best over a longer period. 

Time and risk are also related. 

If you are young and have many working years ahead of you, you can afford to take bigger risks with your investments than an older person close to retirement.

Be realistic: adjust your investment objectives to fit in with your time horizon and risk tolerance level.

You also have to realise that you need to align your time horizon, risk tolerance and investment objectives. 

You might have a very short time horizon before retirement and a low risk tolerance, you might want to see significant capital growth. 

It is important to be realistic:  you have to adjust your investment objectives to fit in with your time horizon and risk tolerance level.

This also means you will have to find a balance between the risk you are prepared to take and your preferred returns.  Risk and reward are always at opposite end of the scale - the higher the risk, the higher the potential return, and the lower the risk, the lower the expected return.

Therefore, the importance of you knowing more about who you are and how you want your money to work for you at this stage in your life. 

The Aim of Almost Every Investor

The aim of almost every investor is to obtain a combination of safety, income and capital growth. 

Sir John Templeton

The January Effect

Dow is down 3% in January 2010.

Do you believe in the January effect?  I don't.

Three most important personal factors to consider: Your Time Horizon, Risk Tolerance and Investment Objectives

How well do you know yourself

In understanding your relationship with money, what are the 3 most important personal factors to consider?

These are:

1. how long or short a time you have to invest
2. how much risk you can tolerate, and,
3. your investment objectives and whether they fit in with your time horizon and risk appetite.

Cash flow is another important factor to keep in mind when you assess your personal situation.  You need to have a good idea of your cash inflows and outflows and of how to do a balancing act between the two.  That is why a cash-flow needs analysis is such an important part of any financial advice programme.

By knowing more about yourself and where you want to be, you can now use this knowledge to construct an investment portfolio that fits your unique needs: 

• your time horizon,
• your risk tolerance and
• investment objectives. 

In short, you have created an investment portfolio tailor-made, so that your money can work for you.


Related:
Understand what money means to you:  Answer 10 simple questions
http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html

Asset Allocation:  The Best Way to Minimize Risk of Your Portfolio
http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html

Reviewing the Financial Basics of Investment

• Long hours of back-breaking work do not guarantee financial independence.

• You need to work smarter with your money.  Let your money work for you.

• This can be achieved by clever investing and the magic of compounding.  This is the only way in which you can really beat your ultimate enemy, inflation, over the longer term.

A difficult environment - why invest? Take time out to try and understand the nuts and bolts of investment.

Compounding cannot take place without investment. 

It is through clever investment that compounding makes your money work for you.  The two are inextricably linked. 

Investment is closely associated with the ups and downs of financial markets. 

The last few years were particularly bad, as we saw the emerging markets crisis, the bursting of the internet bubble, then the terrorist attacks in the United States and the subsequent war taking their toll on investor sentiment, and the recent subprime credit crisis.  Many investors have seen their wealth being eroded and have become disillusioned with investment in general.

Do not neglect your first priority

One of the big problems is that people think they should invest in equities (also called shares or stocks) despite the fact that they answer 'NO' to all the following three questions:

1.  Can you comfortably cover your living expenses, including food and shelter?
2.  Do you have enough cash for emergencies?
3.  Do you have adequate insurance to protect your family?

The fact of the matter is that these items should be your first priority.  It is only SURPLUS FUNDS that you should invest in the stock market.

The fluctuations of financial markets have not proven that investment is inherently bad.  There is no other option if you want to combat inflation and increase the value of your savings over time.  But political and economic crises do emphasise that:

• You should be clever about investing.
• You should know the investment basics.
• You should get serious about your money and retirement.

Time passes all too quickly.  Take time out to try and understand the nuts and bolts of investment.  Do not allow yourself to run out of time.  Read widely and in doing so, you will arm yourself with the knowledge needed to make your money work for you.

Compounding: your ultimate friend

If inflation is your ultimate enemy, compounding is your ultimate friend.

Einstein even called it the eighth wonder of the world - and being the genius he was, he would have known!

Compounding is the best weapon in your arsenal, the one thing that can make your money grow, despite inflation.

Compounding simply means that the returns on the investment grow too, and not only the capital.  It is growth on growth, or interest on interest.

The longer you invest, the more your money will grow.  That is why time is important, and the earlier you start investing the more you will earn.

Delaying your investments is as bad as not investing at all.

Example of Ann and Peter, two young people.

Ann saves $500 a year.  She starts when she is 15 years old and invests in the stock market for 10 years at a return of 20% a year. After 10 years she stops adding money to her nest egg.

Her friend, Peter, only starts to save when he is 40 years old.  After initially squandering his income rashly, Peter starts saving $40,000 a year for 25 years, also at a return of 20%.

Who do you think has the most money at retirement?

• The total amount of $5000 that Ann had saved over 10 years, gave her a grand total of $22.9 million at the age of 65.
• Peter on the other hand, battled to save a total of $1 million and ended up with $22.7 million.

Neither of them will have any financial problems, but the point is that Ann's money grew for 50 years - twice as long as Peter's did, and with much less effort.

How did Ann achieve this?  Not because of:

• the rate of return:  both earned the same return on their investment, nor
• the capital she put in:  Peter put in far more.

But because of:

• the time factor.  Over time, Ann had growth on her money and on her returns.  Compounding is a winning recipe.

Inflation: your ultimate enemy

Inflation erodes your money systematically. 

Inflation simply means that prices of goods and services go up, so the purchasing power of your money decreases and you have to pay more to maintain the lifestyle to which you have become accustomed. 

For example, your pension may seem to be adequate now, while you are saving for it.  However, after a number of years' retirement, you may suddenly realise that the amount you had set aside is not enough and you cannot maintain your standard of living.  With life expectancy on the increase, people often outlive their money.

Even in the current relatively low-inflation environment, inflation can make a big difference in your retirement. 

For example:  if you hid $1,000 under your mattress today and left it there for 20 years, even at a fairly low inflation rate of 3%, it would have shrunk to the equivalent of $544 - almost half its original value.

So inflation eats away at your money.  It has no regard for how hard you have worked, how many hours you have put in or even how efficient you are.  Your money simply becomes worth less as time goes by.

Your money's job description and your principal financial goal: "Work to give a real rate of return."

Return is a very important concept in the investment world.  It is simply the difference between the money you start off with and the money you end up with.  In other words, how your money has grown. 

The rate of return is the pace at which you achieve that growth, and is normally expressed as a percentage per year. 

The nominal rate of return does not take inflation into account, while the real rate of return is the nominal rate of return less the inflation rate.

E.g.

Nominal rate of return for FD 4%
Inflation 3%
Real rate of return for FD 1% (4% - 3%)

You should learn how your money can work for you to increase over time and to beat inflation.

Your money should give you a real rate of return.  This should be your money's job description and your principal financial goal.

A few sobering statistics. Only 6 out of 100 people achieve financial independence

It is estimated that out of every 100 people aged 25 today, in 40 years' time:

• only 6 will be financially independent
• 34 people will have passed away
• 10 will be drawing a government pension,
• 20 will still be working, and,
• 30 will be dependent on relatives.

How many people of 60 and older do you know who are dependent on their family or still have to work?  Scary, isn't it?

Many people do not realise that, despite their strong work ethic, their hard work alone is not enough to help them on their way to accumulating wealth and becoming financially independent.

To gain financial independence, your money must work for you.  You need to be smart about money, and you need to know your money's enemies and friends.

The story of Rockefeller

As a teenager, John D. Rockefeller, one of the richest men in America in the 19th century, earned $1 hoeing potatoes for a neighbour for 30 hours.  A week later, he collected interest of $3.50 on a loan he had made to another farmer a year earlier.  Rockefeller learned early on that you do not necessarily need to work harder, but that you do need to work smart.

If you share Rockefeller's determination and want to end up being one of the 6 out of 100 people without financial worries when you retire, you should learn to invest early.

Everyone wants to be financially independent

Acquiring investing knowledge is important. The earlier you acquire this knowledge of how your money can work for you, the better for you.

In order to gain financial independence you need to understand first and foremost that hard work is important, but not enough. You should also be clever about making the money you earn work hard for you.

You also need to know yourself before you make any investment decisions. Your objectives and the time you have in which to achieve them are the 2 most important factors when deciding on an investment programme.

Unfortunately, very few investors realise this when they start. You will need to find out how much risk you can tolerate, as well as what your relationship with money is.

Investment options are increasing dramatically in number and sophistication. Many people stumble along, buying a share here and a unit trust there. Only when they start learning about investments do they realise that they have made a mess of things. You have to make the most of this sophistication by adhering to simple principles and basic truths when compiling your investment portfolio.

The road may sometimes be bumpy, and at times you may wonder whether it would not have been more prudent to keep your hard-earned money under your mattress. But you will see that patience will be rewarded, and the ability to achieve long-term objectives depends on a long-term plan.