Facets of investing

The following is a great exercise that enables you to think like an investor. And its fun, too! 

Everything in life is investing: You use a set of resources in order to obtain something, which value is greater than the sum of those resources. Be it “investing” in its classical meaning or anything else created in life.

For example, your work. Is it investing? Of course! You invest one of the most important resources, your time, in order to obtain a return, a paycheck at the end of the month. This investment can be a good one, if you feel that the payment is OK for the time you have invested, or not. It can also be a risky investment, if you work without any contract or commission-based.

Other example, you buy an mp3 player. Is it an investment? Hell yeah! You spend one of your resources, money, to obtain a result: ability to play music for thousands of hours of entertainment. You would not buy this gadget, if the subjective value you put on its usage was below the price you have to pay, right? It can be a good investment, if you are happy with the player, and it can be a risky one: when its quality is not as good as expected or it goes broken very soon.

There are thousands of examples. Can you think of any?

December 7, 2006 | Filed Under Tips & Tricks | 1 Comment 

Playing safe

Whether you’re a newbie or an experienced investor, playing safe is the only way to make profit again and again. The are different rules you have to follow depending on what you invest in. However there are two tips that can be applied to ANY kind of investment project:

1. Information

How easy it would be to become a millionaire in a matter of few weeks if you just knew what would happen the next day!… Or even the next few hours! This omni-knowledge makes the picking of the right investment a childs game. The risk is non-existent.

Did you ever wondered what the difference between experienced and a newbie investor is? Knowledge. Information lessens the risk of investing. Now, no one can tell what will happen the very next day, not even the best investors, because of the mere fact that no one has the WHOLE information that may influence the performance of your investment.

The “butterfly effect” says that even a butterfly could provoke a chain of events that could be world-changing. And who can predict such a chain? Nobody, because nobody has the information about the source and the result of this chain of events up-front. And while the example of a “butterfly changing the price of your stocks” is quite unrealistic, many other event-changing sources exist that are much more probable to influence your investments. And those are the sources that you should study and have the information about.

So, the first rule is to learn everything you can about what you will invest in and about everything that might influence your investment either way.

2. Diversification

Because of the problem of uncertainity discussed above (that no one has ALL information that can change the course of an investment project, which means that risk ALWAYS exists) you should ALWAYS diversify your investment capital in several investment projects.

diversify investment risk
Note: I call “investment project” one or a set of same or different investment products: real estate, stocks, bonds, etc.

An example to prove my point:

Lets say an investment has the probablility of 1 out of 10 to be unsuccessful. That means there are 10% risk.

Now lets say you invest your money in 2 different projects of the same risk level (10%). The probability that both turn negative is therefore:

(1-(0.9*0.9+0.9*0.1*2))*100=1%

You have successfully lowered the risk of 10% to 1% by investing in 2 different projects of the 10%-risk-level! Of course you shouldn´t forget the 0,09*2*100=18% chances that one of them will turn negative, but this problem can also be solved by playing with projects of different risk levels and by investing different amounts based on risk level of the project.

I won´t explain on this point how the probability caluculation works. Maybe the next time. Just keep in mind: the more you diversify, the better. :-)

In moneysupermarket, playing safe is extremely important. Borrowing a loan should be the last resort, whether it is a form of student loans set up or any other form. For microsoft work at home issue, people go for secured loans. Even that is not preferred.

December 5, 2006 | Filed Under Tips & Tricks | 1 Comment 

How much to invest?

As a rule of thumb we (in the bank) say to our clients, they shouldn’t invest more than 30% of their paycheck. I say, it depends. It depends on several things.

  1. First, you’ve got to record what you are spending for several months: rent, food, bills, etc. So you can approximately plan what you’re spending monthly.
  2. Add 20% margin to it for unexpected stuff.
  3. The rest can be invested without fear.

Example: your paycheck is 3000. You spend monthly 1500. You can chip aside: 3000-1500*1.20=1200 -> some 40% of your paycheck.
Still, the money you have put aside for monthly spendings can still be “invested” in very secure products and can be used anytime. Just ask your financial advisor for “very conservative, but liquid products”. We offer a “money market” account that is almost like a checking account, but gives you some extra bucks a month.

Move your money, USE your money. It’s having good time right now in your checking account doing nothing. Make it WORK for you, damnit. Otherwise it will be slowly eaten up by the good ol’ inflation. Your bank will have a good profit from it… but will YOU?

Think about it.

December 2, 2006 | Filed Under Tips & Tricks | Leave a Comment 

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