Investment Road Map

Image Credit: 401(K) 2012/Flickr

As another year draws to a close, the New year will be the first blank page of a 365 page book. We all want to write a good one. Don’t we?

Soon, it would be all about setting new goals and making new resolutions; like learning a musical instrument, making a new friend every month, starting to exercise, giving up chocolate, or even breaking a world record. This list can go on and on, but wait a minute, be sure not to omit a very major item on your list. In fact it should be first on your list. It's a resolution to invest wisely in the coming year.

Mind you, according to recent statistics, Only 8% of people are always successful in achieving their resolutions. 19% achieve their resolutions every other year.  49% have infrequent success.  24% NEVER succeed and have failed on every resolution every year. 

Therefore, it's not about the lengthiness  of your resolution list but the ability to be counted as part of the 8%, giving priority of course to what I consider the paramount item;  ‘investing wisely’.

So, from me to you, this comes as the long awaited sequel to ‘What to do when you've got more money than you need’, in other words, how to invest.

When it’s about investing, remember that  “The first rule is not to lose and The second rule is not to forget the first rule.” – Warren Buffett.

Because risk appetites vary, the best way to invest is to start by setting out on a journey to discover where you stand, i.e. checking your risk appetite and then opting for investments that suit you.

This sounds pretty straight forward, doesn’t it? Well the next question one may ask is “now that I have assessed by appetite; what are the options open to me?”.

To answer this, let’s take an illustration from three good friends; Andrew, River and Walt. Now they had low, medium and high risk appetites respectively;

ANDREW

Image Credit: 401(K) 2012/Flickr

Andrew with his low risk appetite would chose a low or ‘risk-free’ investment. He prefers to have a good night's sleep all year round doesn’t he?

Thus the options open to him are placements, bonds or treasury bills. These investments are most times government backed however they offer low return on investments; usually ranging from 4%-15%PA. Now while the risk is very low, if Andrew takes inflation into consideration it may turn out that rather than making a gain, he may actually make a loss.

To understand this better let's take an illustration; Assuming Andrew invests $ 1,000 in placements which promises 7% PA, with an inflation rate of 9%, at the end of one year he would get a total of  $1,070 right? Now imagine as at the time of the investment, his $1,000 could buy him a basket of goods; however as at the time of maturity of the investment, these same basket of goods will go for $1090 as a result of the 9% inflation. So it turns out that Andrew is actually worse off.

Consequently, "In investing, what is comfortable is rarely profitable." - Robert Arnott. Thus when investing in these low risk securities, one needs to do proper analysis and ensure the rates being offered are worth it.

RIVER

Image Credit: Deutsche Fotothek/ Wikimedia

Now, for River; with his medium appetite, he most probably would want a diversified portfolio; i.e. have some low risk investments and some high risk investments. So while some money would be invested in low risk investments such as, bonds and treasury bills, he’ll also invest some in a business. His investment in business could be via purchase of shares; this represents higher risk due to the volatile nature of equity investments. It’s a common believe that the average return on equity investments ranges between 10-12% PA, unfortunately, it’s not quite that simple. However, this option is likely to put River in a much better situation as depending on his mix of investments.

Expectedly, his returns should be higher than Andrew’s right?. Be on the look out though, because "The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher.

Investing recklessly will ultimately lead to regrettable investment decisions, so be sure to get your analysis right before setting off. Of course you know that this goes way beyond just listening to popular opinion.

WALT

Image Credit: Patisserie/Wikimedia

Walt belongs to the school of thought that believes that if there is no risk, there is no reward. He tells himself often that life is either a daring adventure or nothing at all. Walt believes that investments are all about profitability and would go for investments that offer the highest returns irrespective of risk.

Walt’s investments range from owning his own business, to venture capital trusts, to unregulated collective investment schemes, to spread betting (more like placing a bet than making an investment. You bet on whether something – like the value of a share – will go up or down. The more it changes, the more you stand to win or lose) and so on

Now while Walt’s returns are open to greater risks, on the flip side, he is being offered the highest return on his investments – if all goes as smoothly as he hopes. Sometimes the return on highly successful personal businesses can be as high as 70% or more, not without the risks though.

In summary, you really don’t need to invest like Andrew or his buddies. However, since everybody falls into one of these 3 categories of individuals, what matters is that you identify your field of play and play by your own rules. After all, it's your money!

What better way to sign off than to leave you with these wise words from Robert Kiyosaki.

"It's not how much money you make, but how much money you keep, how hard it works for you, and how many Generations you keep it for."

Ponder that!

New Govt Proposal: Good News For UK Employers Or Not?

Image Credit: Ian MacKenzie/Flickr

Recently in the UK, the Government proposed a new form of salary-linked pension scheme that would allow employers to walk away from some promises if they end up being too expensive. Implying that workers pensions would no longer be protected against the risk of inflation.

This Proposal -“flexible defined benefits”, transfers more risk to savers by removing the requirement for schemes to upgrade pension payments in line with inflation, thereby sharing the risk between employers and employees evenly. Thus making it less costly for employers to manage such schemes.

Although this might sound like the Government is being biased toward the employers running such schemes, on the contrary, the Government has done this having workers' pensions in mind, because It made this proposal in a bid to stop companies shutting such costly schemes altogether. Closures such as these, end up making workers worse off.

Employers who end up halting such schemes argue that the schemes turn out being very expensive to run because of either high risks associated with investment returns or the rising life expectancy of scheme members.

At the moment, the Government is also being advised to consider lowering its proposed new pension charges cap from 0.75% to 0.50%, as advocates argue that worker’s retirement income would be boosted by thousands of pounds if the Government imposed a lower cap on pension scheme fees.

Twitter’s Public Offering: What’s In It For You?

Are you aware that there are now 218 million active monthly users on Twitter worldwide? There are also over 500 million active registered users, with 100 million of them logging in on a daily basis, resulting in a daily average number of tweets of 58 million, generating 1 billion tweets every 5 days!

You will be surprised to know that 3 million websites are integrated with Twitter. Now, 87 percent of Twitter’s revenue comes from advertising, with 65% of its advertising earnings coming from ads on tablets and Smartphones. However, inspite of these impressive numbers, Twitter has never made a profit? Did you get that? Never made a profit!

With these statistics, I’m not sure the Twitter IPO (Initial Public Offering) is completely out of place.

Come November, Twitter will be offering itself on a dish to the public. There will be a lot of expectations for Twitter’s market debut. Twitter has announced that they will sell their shares between $17 and $20, and they plan on selling upwards of 70 million shares valuing the online messaging company at about $11 billion. This is $4 billion less than analysts had expected, and far below the $100 billion valuation that Facebook received in its IPO in May 2012.

Before it went public, Facebook had reported an annual profit of $1 billion and revenue of $3.7 billion. In contrast, Twitter reported a net loss of $79.4 million on revenue of just $316.9 million in 2012.

Twitter's executives are however optimistic about the IPO plan as they work around the clock dotting i’s and crossing t’s. They organized an eight-day roadshow to promote Twitter's IPO with the aim of selling up to $1.6 billion worth of shares in the second largest social media company.

In a bid to avoid hitches, Twitter has also chosen the NYSE for its forthcoming initial public offering ditching the NASDAQ to avert the kind of disappointment that followed Facebook’s IPO.

If you happen to be one of the 500+ million users of Twitter, I guess you’re wondering what you stand to gain for all those months/years of devoted twitting? How is Twitter going to reward you for your loyalty you may ask. Well, I have no ready answer to that question, but Facebook after its IPO introduced some stunning features like the Graph search features, an improved iOS update that allows structured personal status updates, better privacy settings and so on. Maybe twitter can offer you something better. We’ll just have to wait and see.

Financial Market

Debt Ceiling

Best Time To Spend

What to do when you've got more money than you need

Image credit: Steve Wampler/Flickr

Have you got more money sitting in your account than you need?

Some may ask, what's the right amount of money to keep in order to cover current expenses? Just like anything else, this will generate various opinions. But the safest thing to do is to keep enough money on hand to cover at least two months expenses. So what should be done with the excess?

Once in a while we may run into some loose cash and then the next question which pops up in our head is what to do with it: Should we consume more, buy that pricey car, spoil the loved ones in our lives or should we invest and hope it grows into something much bigger.

The conservative ones may choose to bury the extra cash in a savings account and don’t care if it’s earning next to nothing. "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen.

Well, putting money in a savings account will not suffice.  As interest rates remain extremely low, your money is actually losing its value to inflation.

On the opposite end are the risk lovers, who may decide to do more adventurous stuff with the money. Here you have people who might decide to make riskier investment choices, acquire businesses, or become business owners themselves. This has its cons too.

Businesses also contain an element of risk and statistics have revealed that when investing in new businesses, if the amount of money required for the business is $10 for instance, you should be ready to forgo double that amount. It has also been shown that the first invested sum usually goes down the drain (sunk cost). So except you happen to be one of those lucky ones who’ve got the instincts of a cat and know when not to invest, this option might just be darn too risky.

So now you know that keeping large sums in a savings account is like burying one’s talent in a napkin, and you also know that it’s not advisable to dive headlong into investing in businesses, one may decide to shun investments and divert all funds towards consumption. Now is this a smart decision to take? Let’s find out, shall we?

Let’s draw from the experience of John; John was gainfully employed with a commercial bank in the city. He earned an impressive income and lived comfortably in a rented luxury apartment, he ensured his children went to the best schools and his wife made her hair, make-up, shopped, and so on, in the choicest places in town; vacations were being enjoyed lavishing, at times weekends were in exotic cities, he changed his cars at will and changed his phones immediately a later version was introduced. He was living “the life”...He truly was.

However, due to one Government policy, restricting banks from delving into some business lines, John’s job function was rendered redundant and in no time he was laid off by the bank. Thus he had no source of income; he had to move to a cheaper apartment in the suburbs, switched his children’s schools, and cancelled the customary lavish family vacations, etc.

Now, John was in trouble, he then realized that with the amount of money that had gone through his hands, he would have been able to secure a better future for himself and his family if he had spent wisely, rather he lived only for the moment and consumed all. John overlooked something very vital.

So, I think we’ve all learnt from John’s experience, and you can now agree that it is better to use that spare cash to kick-start something that promises a high probability of multiplying your wealth. I’m referring to sound investments now.

The good news is that you don’t have to be a genius to invest well. Buffet once said, “You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ...” Did John ever hear this? I very much doubt that.

Safeguarding you from John’s missteps, our Investment road map should be able to guide you in making sound investments. 

Managing an unpaid leave

Photo credit: Kristina Alexanderson/Flickr

As the US Government shutdown continues with no clear end in sight, hundreds of thousands of workers are waking up to the awful news that they are on unpaid leave, and even worse, they don't know how long this will last.

If you happen to fall into this category of workers or you know someone who does, here are a few tips on how to manage the situation.

#1: Focus on the essentials

Photo credit: Thomas Hawk/Flickr

It’s time to streamline your expenses towards what’s essential. As resources dwindle, the key thing to remember is to spend whatever that is left wisely.

Now is not the time to get a facelift, revamp your wardrobe, go on a shopping spree, or sign up for another credit card. Just focus only on the essentials – health, food, bills, transportation and so on.

#2: Turn to your savings

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I’m certain not referring to your retirement savings here. Withdrawing money from a retirement account before retirement age should be a last resort after all last resorts. Here’s where the liquid / short-term savings come in handy.

However, when it comes to what you spend on, be sure to seek the best values in the market. Paying a high price is certainly no guarantee that you’re getting high quality.

#3: Find income elsewhere

Photo credit: Flood G./Flickr

Who says you can’t earn from home? A person who is home all day can still earn a small income. If you take a good look around your home, chances are you have some items you never use.

Are you thinking what I’m thinking? It’s time to convert that clutter to cash. When was the last time you had a garage sale? Now will be a good time for that.

Doing jobs around your neighbourhood too can be considered. Also try turning your hobbies into small earnings; it’s a lot more fun than some jobs and rewarding too.