What money means to you? Answer 10 simple questions.

What money means to you? Answer 10 simple questions.

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

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.

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This is an excellent exercise for self-discovery and building a foundation for a sound financial plan. The questions below are designed to uncover your psychological drivers, risk tolerance, and core beliefs about money to help set guidelines for your investment portfolio.

Please answer these 10 questions as honestly as possible. There are no right or wrong answers.

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Your Money Psychology & Investment Orientation Test

1. The Primary Purpose: What is the primary role you want money to play in your life?

• a) Security and peace of mind (to eliminate financial anxiety).

• b) Freedom and flexibility (to make my own choices with my time).

• c) A tool for building wealth and achieving long-term, large-scale goals.

• d) A means to enjoy life's experiences and luxuries now.

2. The Windfall Reaction: If you received an unexpected $10,000 bonus today, your first instinct would be to:

• a) Immediately pay down debt or add it to your savings account.

• b) Spend it on a vacation, a nice gift, or an experience you've been wanting.

• c) Invest the entire amount in a diversified portfolio for the future.

• d) A mix: save some, spend some, and maybe invest a little.

3. Market Volatility Response: Imagine you invest $5,000, and over the next 3 months, the market drops 20%. Your portfolio is now worth $4,000. What is your most likely reaction?

• a) Panic. I would sell my investments to prevent further loss.

• b) Concern, but I would hold tight and wait for it to recover.

• c) Opportunity. I would consider investing more to "buy the dip."

• d) I would feel indifferent; I invest for the long term and expect these fluctuations.

4. The Time Horizon Lens: When you think about investing, what timeframe feels most comfortable to you?

• a) Short-term (1-3 years): I may need the money soon.

• b) Medium-term (3-7 years): For a major purchase like a house.

• c) Long-term (7+ years): This is for my retirement, which is far away.

• d) I don't have a specific goal; I just want to grow my money.

5. The Emotion of Spending: How do you typically feel after making a significant, unplanned purchase?

• a) Guilty and anxious, second-guessing my decision.

• b) Thrilled and satisfied, with no regrets.

• c) Neutral; I budget for flexibility and this was within my means.

• d) It depends entirely on what I bought and the value it brings.

6. Financial Role Models: Which statement best describes the financial lessons you learned growing up?

• a) "Money doesn't grow on trees." / "We have to be careful with our spending." (Scarcity Mindset)

• b) "It's important to enjoy what you earn." / "You can't take it with you." (Spending Mindset)

• c) "Save for a rainy day." / "Always have a safety net." (Security Mindset)

• d) "Make your money work for you." / "Invest in assets." (Wealth-Building Mindset)

7. The Risk Thermometer: On a scale of 1 to 5, how do you feel about potential investment risk?
- 1 - Loss Averse: The possibility of any loss is unacceptable. I prefer guaranteed, low returns.
- 2 - Cautious: I'm comfortable with very low risk for stable, modest growth.
- 3 - Balanced: I can accept moderate risk and occasional downturns for the chance of better returns.
- 4 - Growth-Oriented: I am willing to accept significant risk for the potential of high growth.
- 5 - Aggressive: I am comfortable with high risk and volatility for the possibility of maximum returns.

8. The Legacy Question: What best captures your long-term financial aspiration?

• a) To be completely debt-free, including my mortgage.

• b) To achieve financial independence, so work is a choice, not a necessity.

• c) To build substantial wealth that can be passed on to my family or charity.

• d) To have a comfortable life without financial stress, without necessarily being rich.

9. Information Digestibility: When it comes to managing your investments, you prefer to:

• a) Set it and forget it. I don't want to check my portfolio frequently.

• b) Receive regular summaries and only be alerted for major decisions.

• c) Be actively involved, researching and adjusting my portfolio regularly.

• d) Delegate the decisions to a trusted financial advisor.

10. The "Enough" Number: Financially, what does "success" look like for you in 10 years?
- a) Having no financial worries and a solid emergency fund.
- b) Being able to work because I want to, not because I have to.
- c) Seeing my investment portfolio consistently growing year after year.
- d) Living a life rich in experiences, funded by my investments.

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How to Use Your Results:

Once you've answered, review your choices. Look for patterns:

• Mostly A's: Your primary money motivation is Security. Your investment portfolio should be heavily weighted towards capital preservation (e.g., high-yield savings, bonds, conservative funds).

• Mostly B's: Your primary money motivation is Lifestyle & Freedom. You need a balanced portfolio that allows for both growth and liquidity for experiences, with an automatic savings plan to keep you on track.

• Mostly C's: Your primary money motivation is Wealth Building. You likely have a higher risk tolerance and a long-term focus. Your portfolio can lean more towards growth-oriented assets like stocks and equity funds.

• Mostly D's: You have a Pragmatic or Delegator style. You value simplicity and expert guidance. A diversified portfolio with a mix of assets or using robo-advisors/managed funds would suit you well.

This self-assessment provides a crucial "why" behind your financial decisions, allowing you to build a portfolio strategy that you can stick with emotionally and psychologically, not just mathematically.

Knowing yourself – Investment Objectives, Time Horizon and Risk Tolerance.

 Knowing yourself – Investment Objectives, Time Horizon and Risk Tolerance.

Elaboration of Section 2

This section acts as the crucial bridge between the theoretical philosophy of Section 1 and the practical strategies that follow. It argues that even the most brilliant investment strategy is doomed to fail if it does not align with who you are as an individual. Before you look at the market, you must look in the mirror.

The section breaks down this self-assessment into three core pillars, with a fourth critical factor underpinning them all:

1. Investment Objectives (The "Why")
This is the destination for your financial journey. What is the purpose of this money?

• Examples:

  • Capital Preservation: Simply protecting your initial capital from inflation (a primary concern for those in or near retirement).

  • Income Generation: Needing the portfolio to produce a regular, reliable cash flow (e.g., for living expenses in retirement).

  • Capital Growth: Aiming to increase the value of the portfolio significantly over time (common for younger investors saving for a distant goal).

  • Speculative Gain: Acknowledging a portion of funds for higher-risk opportunities (as mentioned in Section 1's Policy D).

• Why it matters: Your objective determines the types of assets you will buy. An income objective leads you to dividend stocks and bonds, while a growth objective leads you to growth stocks. A mismatched objective (e.g., using a speculative stock for capital preservation) is a recipe for disaster.

2. Time Horizon (The "When")
This is the length of time you expect to hold the investment before you need to liquidate it for your objective.

• Short-Term ( < 3 years): Money for a down payment, a car, or an emergency fund. This money has no business in the stock market due to its short-term volatility. It belongs in cash or fixed deposits.

• Medium-Term (3-10 years): Goals like children's education or a future business venture. Can tolerate some equity exposure but with a significant cushion of safer assets.

• Long-Term (10+ years): Retirement savings for a young person. This horizon can fully embrace the volatility of the stock market, as there is ample time to recover from downturns and benefit from compounding.

• Why it matters: Time is your greatest ally against risk. A long time horizon allows you to take on more short-term volatility (risk) in pursuit of higher long-term returns. A short time horizon forces you to be conservative to ensure the money is there when you need it.

3. Risk Tolerance (The "How Much Can You Stomach")
This is a psychological and emotional assessment of your ability to endure fluctuations in the value of your portfolio without panicking.

• Conservative/Low Tolerance: You lose sleep when your portfolio value drops. You prioritize peace of mind over high returns. You are likely a Defensive Investor.

• Aggressive/High Tolerance: You view market dips as buying opportunities. You can watch your portfolio decline significantly without feeling the urge to sell. You are likely an Enterprising Investor.

• Why it matters: The biggest enemy of investment returns is often our own behavior—selling in a panic during a crash. Knowing your risk tolerance helps you construct a portfolio you can stick with through market cycles. The provided link to a money questionnaire is a tool to help quantify this often-intangible feeling.

4. The Underpinning Factor: Financial Capacity & Cash Flow
The section wisely notes that your personal financial situation is the bedrock of everything.

• Financial Resources: How much money do you have to invest? A small investor may start with mutual funds for diversification, while a larger one can build a portfolio of individual stocks.

• Cash Flow Analysis: Understanding your income and expenses is critical. You should only invest money you do not need for living expenses and emergencies. Investing money you can't afford to lose or might need soon forces you into a short-term, high-pressure mindset, which is the antithesis of intelligent investing.

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Summary of Section 2

Section 2 emphasizes that successful investing is deeply personal and begins with a rigorous self-assessment of your Investment Objectives, Time Horizon, and Risk Tolerance, all supported by a clear understanding of your Financial Capacity.

• Investment Objectives define your financial goals (e.g., growth, income, preservation).

• Time Horizon (how long you can invest) determines how much market risk you can afford to take.

• Risk Tolerance (your emotional comfort with volatility) determines how much market risk you can personally handle.

By honestly answering these questions, you can create a personalized, "tailor-made" investment plan. This self-knowledge ensures you select strategies from Benjamin Graham's menu (Section 1) that you can stick with consistently, preventing the emotionally-driven mistakes that destroy wealth. In essence, this section ensures your portfolio is built for you, not just for the market.

Know your Investment Profile

Your investment profile

Define your investment profile by identifying:
1.  Your goals and constraints
2.  Your risk ability and tolerance
3.  Your cognitive biases and their impact on your emotions.


Profiling:  everyone is unique

Differences go beyond the level of wealth and stem from:

• 1.  Age
• 2.  Education
• 3.  Phase of life
• 4.  Profession
• 5.  ...

Financial situation as the core of your profile

1.  A very wealthy person with relatively little planned expenses

• Will be able to take considerable investment risk, as you have enough funds aside to absorb potential losses.
• Will be said to have a "high risk ability"

2.  A person with limited wealth and a large part of his assets reserved for financial commitments:

• Can only take limited investment risk, as he lacks funds to cover potential losses
• Will be said to have a "low risk ability"

Ranking the objectives is also key

1.  List your objectives and rank them by degree of priority:

• Saving for retirement
• Providing for children's education
• Purchasing real estate objects

2.  Risk tolerance will be:

• High for less important objectives
• Low for important objectives

Investment horizon:  the longer, the better!

1.  The longer the investment horizon, the higher the risk ability

• .... as investments may recover from potential losses

2.  The shorter the investment horizon, the lower the risk ability

• .....  as investments cannot recover from potential losses.

3.  Unless you want to speculate ... but at your own risk!

Cognitive biases and the 3 steps in investing

Cognitive biases affect investment decisions when:

1.  Defining the investment universe

• Choosing which asset classes / securities are taken into consideration

2.  Constructing the optimal investment strategy

• Forecasting expecting returns and risk

3.  Adjusting and rebalancing the portfolio.

Cognitive biases:  defining the investment universe

When defining the assets universe you want to invest in:

• You tend to over-invest in local companies (home bias)
• You tend to overweight recent information (recency bias)

You should get out of your comfort zone and do extensive research on securities which may not necessarily be close to your home, nor provide readily available information.

Cognitive biases:  constructing the portfolio

When making forecasts:

• You may be influenced by recent data, which may not be relevant (anchoring bias)
• You tend to be over-confident (overestimating expected returns and / or underestimating risk)
• You tend to look for evidence which will confirm our beliefs and ignore information that contradicts them (confirmation bias)

Look for the black swan!

Cognitive biases:  rebalancing

When rebalancing the portfolio:

• You tend to overestimate the value of assets you own and underestimate the value of (similar) assets you do not own (endowment effect)
• You tend to sell winning positions too soon and hold onto losing positions for too long (disposition effect)

The right question to ask yourself

For example:  

You bought 1000 Nokia shares at 30 EUR.  The stock goes to 60 .. and then drops to 20 EUR.  The question to ask yourself is:

"If I had 20,000 EUR today, would I purchase 1000 Nokia shares?"

• If you answer "yes", then keep the position.
• If you answer "no", then sell it.

Conclusions

Before constructing a portfolio, you need to define your

• Objectives
• Risk ability and tolerance

You should be aware that you are influenced by cognitive biases which may lead to sub-optimal investment decisions.

You should try to adjust as much as possible for these biases.

Risk Objectives

An example of an absolute risk objective would be that the client does not want to lose more than 5% of her capital over a particular period.

Relative risk objectives relate risk to a certain benchmark that represents an appropriate level of risk.

Risk tolerance is a function of BOTH:

• a client's ability to take risk, as well as,
• her willingness to take risk.

Ability to take risk

The ability to take risk is a function of several factors including:

• time horizon,
• expected income, and 
• net worth.

Generally speaking, a client with a longer time horizon, high expected income and greater net worth has a greater ability to bear risk.

Willingness to take risk

A client's willingness to bear risk, on the other hand, is based on more subjective factors including 

• her psychological makeup and 
• level of understanding of financial markets.

4 scenarios:

1.  Ability to take risk - below average.  Willingness to take risk - below average

The investor's overall risk tolerance is below average

2.  Ability to take risk - above average.  Willingness to take risk - above average

The investor's overall risk tolerance is above average

3.  Ability to take risk - below average.  Willingness to take risk - above average

The investor's overall risk tolerance is below average

4.  Ability to take risk - above average.  Willingness to take risk - below average

The investment manager should explain the conflict and implications to the client.

When there is a mismatch between a client's ability and willingness to take risk, the prudent approach is to conclude that the client's tolerance for risk is the lower of the two factors.

Any decisions made must be documented.

Portfolio Management - Return Objectives and Investment Constraints

Return objectives can be divided into the following needs:

1. Capital Preservation - Capital preservation is the need to maintain capital. To accomplish this objective, the return objective should, at a minimum, be equal to the inflation rate. In other words, nominal rate of return would equal the inflation rate. With this objective, an investor simply wants to preserve his existing capital.

2. Capital Appreciation -Capital appreciation is the need to grow, rather than simply preserve, capital. To accomplish this objective, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base.
3. Current Income -Current income is the need to create income from the investor's capital base. With this objective, an investor needs to generate income from his investments. This is frequently seen with retired investors who no longer have income from work and need to generate income off of their investments to meet living expenses and other spending needs.

4. Total Return - Total return is the need to grow the capital base through both capital appreciation and reinvestment of that appreciation.

Investment ConstraintsWhen creating a policy statement, it is important to consider an investor's constraints. There are five types of constraints that need to be considered when creating a policy statement. They are as follows:

1. Liquidity Constraints - Liquidity constraints identify an investor's need for liquidity, or cash. For example, within the next year, an investor needs $50,000 for the purchase of a new home. The $50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for the investor.
2. Time Horizon - A time horizon constraint develops a timeline of an investor's various financial needs. The time horizon also affects an investor's ability to accept risk. If an investor has a long time horizon, the investor may have a greater ability to accept risk because he would have a longer time period to recoup any losses. This is unlike an investor with a shorter time horizon whose ability to accept risk may be lower because he would not have the ability to recoup any losses.
3. Tax Concerns - After-tax returns are the returns investors are focused on when creating an investment portfolio. If an investor is currently in a high tax bracket as a result of his income, it may be important to focus on investments that would not make the investor's situation worse, like investing more heavily in tax-deferred investments.

4. Legal and Regulatory - Legal and regulatory factors can act as an investment constraint and must be considered. An example of this would occur in a trust. A trust could require that no more than 10% of the trust be distributed each year. Legal and regulatory constraints such as this one often can't be changed and must not be overlooked.

5. Unique Circumstances - Any special needs or constraints not recognized in any of the constraints listed above would fall in this category. An example of a unique circumstance would be the constraint an investor might place on investing in any company that is not socially responsible, such as a tobacco company.

The Importance of Asset AllocationAsset Allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 

The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.
Citizens in other countries around the world would have different asset allocation strategies depending on the types and risks of securities available for placement in their portfolio. For example, a retiree located in the United States would most likely have a large portion of his portfolio allocated to U.S. treasuries, since the U.S. Government is considered to have an extremely low risk of default. On the other hand, a retiree in a country with political unrest would most likely have a large portion of their portfolio allocated to foreign treasury securities, such as that of the U.S.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/return-objectives-investment-constraints.asp#ixzz1yfCssLbg

Portfolio Management - The Portfolio Management Process

The portfolio management process is the process an investor takes to aid him in meeting his investment goals.

The procedure is as follows:

1. Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.
2. Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions.
3. Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements.
4. Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.

Policy StatementA policy statement is the statement that contains the investor's goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process.The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment portfolio manager in meeting the investor's needs. When there is market uncertainty or the investor's needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.

Expressing Investment Objectives in Terms of Risk and ReturnReturn objectives are important to determine. They help to focus an investor on meeting his financial goals and objectives. However, risk must be considered as well. An investor may require a high rate of return. A high rate of return is typically accompanied by a higher risk. Despite the need for a high return, an investor may be uncomfortable with the risk that is attached to that higher return portfolio. As such, it is important to consider not only return, but the risk of the investor in a policy statement.

Factors Affecting Risk ToleranceAn investor's risk tolerance can be affected by many factors:

• Age- an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
• Family situation - an investor may have higher income needs if they are supporting a child in college or an elderly relative.
• Wealth and income - an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
• Psychological - an investor may simply have a lower tolerance for risk based on his personality.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/portfolio-management-process.asp#ixzz1yfBLNFTr

Top 10 Things to Do Before You Invest

Top 10 Things to Do Before You Invest
by Michele Cagan, CPA

1. Pay off every penny of credit card debt. You'll earn sky-high (18 to 22 percent!) returns just by paying your credit card balance in full rather than making the minimum monthly interest-laden payments.

2. Build yourself an emergency fund. Start a separate bank account for this purpose alone. It should have enough money to cover at least three to six months of living expenses.

3. Set up and follow a household budget. Keep track of where your money comes from and (even more important) where it's going.

4. Set clear financial goals. Whether you want to save for a new car this year or retirement twenty years from now, you need to know why you're investing.

5. Determine your time frame. How long your money will be working for you plays a key role in designing the best portfolio.

6. Know your risk tolerance. Investing can bring about as many downs as ups, and you have to know just how much uncertainty you can comfortably stand.

7. Figure out your asset allocation mix. Before you start investing, know what proportion of your portfolio will be dedicated to each asset class (like stocks, bonds, and cash, for example).

8. Improve your understanding of the markets. That includes learning about the big picture, such as the global political and economic forces that drive the markets and affect asset prices.

9. Set up your brokerage account. Whether you decide to start out with a financial advisor or take a more do-it-yourself approach, you'll need to have an open brokerage account before you can make your first trade.

10. Analyze every investment before you buy it. Buy only investments that you have researched and fully understand; never risk your money on an unknown.

http://www.netplaces.com/investing/planning-for-success/top-ten-things-to-do-before-you-invest-1.htm

5 "New" Rules for Safe Investing

1. Buy and Hold
History has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity.

Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/buy-and-hold.aspx#ixzz1ZC8MiDKw


2. Know Your Risk Appetite
The aftermath of a recession is a good time to re-evaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work.

Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals? Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/risk-appetite.aspx#ixzz1ZC8qhVwu

3. Diversify
Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage.

Holding a bit of cash, a few certificates of deposit or a fixed annuity along with equities can help take the traditional strategic asset allocation diversification models a step further.
Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/diversify.aspx#ixzz1ZC921poy

4. Know When to Sell
Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game. Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/know-when-to-sell.aspx#ixzz1ZC9IVW7b

5. Use Caution When Using Leverage
As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas.

On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection. Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/leverage.aspx#ixzz1ZC9XvuWx

Everything Old Is New Again
In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context.

In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.
Read: 5 "New" Rules For Safe Investing

Read more: http://www.investopedia.com/slide-show/5-new-rules/old-is-new.aspx#ixzz1ZC9pYbAD

Investing can (and should) be fun. It can be educational, informative and rewarding. By taking a disciplined approach and using diversification, buy-and-hold and dollar-cost-averaging strategies, you may find investing rewarding - even in the worst of times.

Read more: http://www.investopedia.com/slide-show/5-tips-for-diversifying-your-portfolio/conclusion.aspx#ixzz1ZCCNZVfl

What Is Your Risk Tolerance?

It is conventional wisdom that a younger investor can take more risk than an older investor thanks to a longer time horizon. While this may be true in general, there are many other considerations that come into play. Just because you are 65 doesn't mean you should shift your investment portfolio to conservative investments. Growing life expectancies and advancing medical science mean that today's 65-year-old investor may still have a time horizon of more than 20 years.

So, how does an individual investor determine his or her risk tolerance? Let's take a look.

Read on here.

Investing with the big picture in mind

Investing with the big picture in mind
Posted on November 6, 2010, Saturday

YOU don’t have to be an expert to get started, but it helps to know the basics before you set a plan for investing. Since the whole idea of investing can be overwhelming and intimidating for anyone who has never done it, try taking small steps.

Here are some basic Do’s

•Do:

•Get some financial education.

•Invest some time, then money.

•Read books and newspapers.

Attend seminars.

Get together with other like-minded people to learn about investment choices including the stock market, property or even a business.

You might also consider hiring a professional, like a financial planner to go through your current financial situation and goals, and work out a detailed financial plan for you. Besides giving you a professional perspective of your financial health, a good financial planner will know the kind of products in the market that will suit you.

But professional help doesn’t come cheap. So the best option would be to get a recommendation from neutral or independent sources such as the Financial Planning Association of Malaysia (FPAM) or the Securities Commission Malaysia before settling on a planner.

Always remember the three important principles of investing:

1. Investment Goals

What is the purpose of your investment? Is it to achieve high dividend yields or a consistent income yield? Once you’ve determined your short-term and long-term objectives, you can identify suitable investments, the level of risk you can tolerate, and what your expectations are.

2. Know your risk tolerance

High returns come with equally high risk. Realise your ability and willingness to lose some or all of your original investment in exchange for greater potential returns.

If you’re an aggressive investor, or one with a high-risk tolerance, a well-diversified equity fund should take up the majority of your portfolio. If you can take on only a moderate degree of risk, then perhaps a hybrid investment plan such as a 50:50 investment portfolio in a moderate risk fund with significant cash savings in a bank account is your calling.

3. Time horizon

Decide on how long you intend to invest and what stage of your life you’re at. If you are saving up for your daughter’s education in which you will need it in the near future such as within five years, then, you would likely to take on less risk because of a shorter time horizon. Also, maintain at least six month’s income in an easily accessible deposit account or put your money in liquid investments such as unit trust funds. This will allow you to have access to your money in the event of emergencies.

Here are two examples* to give you a general idea:

Scenario 1:

Sharon decides to start investing a sum of RM500 monthly, in an investment vehicle that will yield her an average of eight per cent per annum over the next 30 years till retirement. At the end of 30 years, the total sum of her investment would have amounted to RM750,000.

Scenario 2:

If Sharon decides to start investing five years later, a sum of RM500 monthly, in a similar investment vehicle that will yield her an average of eight per cent per annum over a period of 25 years till retirement, her total nest egg would have only amounted to RM478,000 due to the loss of an additional five years in compounded growth.

* Source: Investment Calculator from HwangDBS Investment Management corporate website www.hdbsim.com.my/tools/general-investment

This article is brought to you by HwangDBS Investment Management, your Asian Financial Specialists; we believe you deserve to live the life you want.

http://www.theborneopost.com/?p=73323

Rational Thinking about Irrational Pricing

Depressed investors cause depressed stock market prices.

Selling pressure mounts and drives prices down.  Investors possessing even modest degrees of aversion to loss capitulate quickly, and the less fearsome succumb soon after.

A downward spiral ensues.

Value investors avoid these scenarios by forming a clear assessment of their averseness to loss.  

Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.  

One way to grasp one's own loss aversion is to recognize that most people experience the pain of loss as a multiple compared to the joy of gain.  The average person greets losses with aversion on the order of about 2.5 times their reception of winnings.

The greater one's loss aversion, the greater value investing's appeal.  For the most acutely loss-averse investors, pure value investing is most suitable (Graham was extremely risk averse).

Understand Your Risk Capacity and Risk Tolerance

You must stay invested in the securities markets to earn market risk premiums

The securities markets pay risk premiums. You have to have your money invested and at risk to be paid a risk premium.

Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific finance studies demonstrate the both amateurs and professionals are lousy at market timing.

Historically, U.S. securities markets have paid substantial risk-adjusted returns or risk premiums to investors. While risk premiums have been substantial, they have occurred irregularly. There have been intervening periods of losses, some of which were substantial. (See: How stable have common stock equity risk premiums been over time?)

To earn market risk premiums, your assets must be invested and exposed to potential risk or loss. The more risk you can tolerate, then the higher your potential return and perhaps the rougher the investment road you may travel. Those who have better emotional tolerance for asset volatility can more easily weather market sell-offs.

Practical considerations will also affect your tolerance of investment risk.

In difficult times, whether you need to liquidate risky assets at depressed prices will depend on your expenses and on your other other holdings of less risky, salable assets. Paying necessary living expenses and taxes are good reasons to withdraw funds. Trying to time the markets for a better return is not a good reason.

If you do not need to take out money during a market retreat and recovery cycle, then risk tolerance is solely emotional. For a risk tolerant investor with stable earned income, the recent bubble crash was just a few years of unpleasantness, if he or she was fully diversified and, therefore, not heavily loaded with technology and communications equities. The same, however, could not be said for those who were poorly diversified and also found themselves to be highly risk averse, when risk actually happened. This is especially true, if job loss forced the liquidation of assets at depressed values.

To some degree, all sane individual investors are averse to risk, so risk tolerance is a relative rather than absolute issue.

Therefore, you need to judge your preference or tolerance for risk relative to other investors. While very few people like investment risk, those who can tolerate it better are those who will be less uncomfortable when risk happens from time to time and market values decline by a little or a lot. Tolerating the potential for loss is the cost that investors occasionally pay so that they are always at the table, when the markets deliver their positive rewards.

The vast bulk of individual investors’ publicly traded investment assets are held in the primary cash, fixed income, and equity financial asset classesin the form of individual securities or funds. Your relative investment risk tolerance should influence how your assets are allocated among these primary financial asset classes. If your actual asset allocation is more risky than your risk tolerance, you may not be able to handle the downturns. You might panic, when you should stand firm. If your asset allocation is less risky than your risk tolerance, then you are likely to need to spend less and save at a higher rate to reach your goals.

Nothing is certain about this process, and that is the nature of investment risk. However, the scientific investment literature is relatively clear on certain points. Amateur and professional investors are just not good at timing changes in the markets. Active strategies that attempt to time market turns have under-performed continuous investment strategies. Consistently and profitably calling serial market turns correctly has been a skill beyond mere mortals and certainly beyond the skill of even the most proud of professional and individual investors.


It is better to buy into the asset markets in proportion to your preferred asset allocation and risk tolerance and to stay in the securities markets through thick and thin.

Trying to sit on the sidelines and jump in when things seem safe simply does not work. When things seem safer, they also seem safer to others. In this situation, securities prices will have already reflected this confidence. Most of the "upside juice" or risk premium will already be reflected in current asset prices and only current securities holders will have been paid. (See: Introduction to investment valuation and securities risk)

The converse of trying to jump out to avoid the downturns also does not work. Real-time securities markets are auctions about the expected value of future securities returns. Particularly toward the downside, markets can react extremely rapidly. Getting out in time does not work, because it is usually too late when you realize you should have sold. Worse, however, you might jump out too early and be absent from the table when the market moves upward. Staying in the markets just tends to work better.

If you are more highly risk averse, it is more appropriate for you to select an asset allocation that reflects your relatively higher risk aversion.

You would hold a relatively small portion of your assets in the more risky equity asset class. Therefore, you might be more comfortable and more able and likely to keep your smaller equity allocation invested at all times. Having a smaller, but sustained exposure to equity assets tends to work much better for the more risk averse investor, compared to jumping in and out of the equity markets in larger proportions.

If you stay out of the markets due to such fears, then you are likely to need to save far more to reach your goals. Over-cautiousness is not a free ride. There is never a safe time to be in the markets, because investing is always inherently risky. There is never a safe time to be out of the markets, because you cannot earn investment risk premiums on the cash under your mattress. (See: VeriPlan helps your to compare investment risk-return tradeoffs)

Finally, you should periodically rebalance you assets back toward your planned asset allocation proportions.

To minimize the negative impacts of investment transactions costs and taxes, you should rebalance infrequently and in a planned manner that anticipates deposit and withdrawal transactions that you would need to do anyway for other reasons.

If you want to understand your personal asset allocation and risk-return tradeoffs over your lifetime, VeriPlan provides powerful, automated "what-if" planning facilities. You can rapidly develop and analyze a range of fully personalized scenarios to see whether your asset allocation strategy would achieve your objectives with a level of risk that is acceptable to you. VeriPlan provides five adjustable and fully automated mechanisms to determine your preferred lifecycle asset allocation. VeriPlan gives you full control over rates of asset returns and asset return variability, and it automatically rebalances your assets annually. It even projects the annual expense coverage by your safer cash and bond assets throughout your lifecycle.

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http://www.theskilledinvestor.com/ss.item.174/you-must-stay-invested-in-the-securities-markets-to-earn-market-risk-premiums.html

Allocate funds wisely, enjoy your golden years

26 Mar 2010, 0427 hrs IST, Lovaii Navlakhi,


Let us take the case study of a 65-year old and analyse the same. Mrs X has Rs 50 lakh and has invested the same in different products. Each of these has different time horizons and varying rates of return; some are taxable and some are tax-free. Mrs X requires Rs 25,000 pm to manage her lifestyle. 

Regular Cash Flow 

At this moment, she may be quite relaxed as her investments are earning more than her required earnings of Rs 25,000 per month. There could be some issues in terms of regularity of the income, as some of the interest payouts are not monthly. Returns from mutual funds may not be regular too, but in this case is a buffer.

Asset Allocation 

The portfolio of Rs 50 lakh has just 12% of the assets in equity, and hence, is a conservative portfolio considering Mrs X’s age. Since this seems sufficient to meet her goals, we are fine with her investment in fixed income instruments to the extent of 88%. There is, of course, a possibility that Mrs X has a running PPF account in which she can deposit the returns from her equity MFs and continue to earn 8% tax-free returns. As one is aware, the maximum that one can add in a PPF account in a financial year is Rs 70,000.

Taxable Income 

The returns from equity MFs by way of dividends are tax free. The income subject to tax amounts to Rs 3,42,500 for the year. However, Mrs X can take benefit of the Rs 1 lakh invested in ELSS under Section 80C (even investment in PPF can get the same benefit, subject to a maximum of Rs 1 lakh at present), and thus have a taxable income of Rs 2,42,500. Since Rs 2,40,000 of income is exempt for senior citizens, Mrs X will pay a tax on only Rs 2,500 @ 10%. Thus, her returns of 8.3% on her portfolio are virtually tax-free.

Liquidity Analysis 

We assume that Mrs X will live to the age of 90 years, and hence she needs this money to last her for the next 25 years. Prima facie, earning a return of Rs 3 lakh per annum does not seem difficult. However, we have not considered the rate of inflation — if it is 6.5% p.a, the funds will last her 20 years. Further, in case she needs Rs 5 lakh as medical emergency, the money will run out in 18 years. An alternative suggestion to Mrs X will be to increase her equity allocation to 25%, and push her portfolio returns to 9% p.a. That way, her funds last her for 25 years, if inflation remains at 5% p.a.

A financial planner will evaluate the portfolio from multiple perspectives such as returns, risks, liquidity, taxability and even longevity; and approaching one could give you peace of mind, and a greater piece of the action on earth. Get one today!

The author is the MD & Chief Financial Planner of International Money Matters Pvt Ltd. 


http://economictimes.indiatimes.com/articleshow/5725337.cms