Dollar Cost Averaging Lowers Your Break-even Point - Investors’ Perspective

This is the continuation of the first article on Dollar Cost Averaging. That article is located here.

Now, we shall look at dollar cost averaging in action. Consider the scenario below:

Let’s say you invest in a unit trust fund, starting with $1,000, and you add up $1,000 to your investment every month. Let’s consider the scenario below:
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Dollar Cost Averaging: Investors’ Perspective

In this article, we shall look at what exactly is Dollar Cost Averaging. This will be looked at in the perspective of an investor (i.e. persons whose investment horizon is more than 12 months). For traders out there, hang on yeah. I will write about dollar cost averaging for traders pretty soon.

Dollar Cost Averaging is a technique used by many investors out there to multiply the returns from their investment.

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How long will it take: The Rule of 72

In the world of finance, there’s a thing called The Rule of 72.

What that rule is about is to basically let you estimate how long it will take to double your money, given an amount of expected return.

There’s actually a complicated way in explaining The Rule of 72 but in this article, I’ll keep it simple.

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Back to Basics: Alternative Investment Asset Classes

A couple of days ago, we had a look at the 4 general investment asset classes.

Today, I shall list out a few others of what I’d like to call as the Alternative Investment Asset Classes.

They are:

Venture Capital

Venture capital is the act of investing in new businesses. The field of venture capital can be very lucrative, providing above average returns, due to the high-risk nature of it. However, the risk of going bust is also quite high.

Basically, what happens is that you, as an investor, provides money to startup firms/companies with long-term growth potential.

Examples: Investing in a new Nasi Lemak business, investing in Nadlique’s Blog :P

Private Equity

A private equity is basically a syndicate (not the bad kind of course) where funds are raised and used to develop new products or technology, expand working capital, make acquisitions and takeovers, or to build up a company’s balance sheet.

You need to have a heck load of money to be involved in private equity, thus it is usually not available to the average individual investor.

Art

There are many things that can be categorised as arts such as paintings, sculptures, and printmaking. These are usually long-term investments whereby capital gains are most likely to be produced.

Examples: Picasso paintings, Van Gogh paintings, Nadlique’s paintings here and here (anybody interested in buying my paintings? Hehe).

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Back to Basics: Paying Mortgage MONTHLY Vs. Paying Mortgage FORTNIGHTLY

Previously in the “Back to Basics” series, I wrote about:

• Back to Basics: Recovering from Negative Returns
• Back to Basics: Asset, Liability, Equity
• Back to Basics: Investment Asset Classes

Today let’s look at the difference between paying off your mortgage monthly versus paying off your mortgage fortnightly.

This concept can also work in the receiving money context (i.e. when you receive rental payments as a property investor, salary, and etc.). Read on and you’ll understand.

First question. Do you think that there’s any difference at all between paying once a month and paying every two weeks? There is a difference. A huge difference actually. Changing your payment method to the fortnightly basis payment method can pretty much change your life.

This little “strategy” is something that is often overlooked by many. It is in fact a proven method to reduce your mortgage faster by cheating yourself without feeling much pain in the pockets. Of course, this depends on the individuals as well. If the person is still very much unable to control his/her financial situation (i.e. struggling with having to set aside money for savings and investments), then there’s no point also.

Anyway, back to the discussion. Say your mortgage repayments every single month is $100.

If you pay the repayments once a month, by the end of the year, the total sum for 12 payments is $1,200, am I right?

However, if you adopt the pay-every-fortnight method, that means, instead of paying $100 per month, you are now paying $50 for every two weeks.

What’s the difference you ask?

Ok, how many months are there in a year? 12.

How many fortnights are there in a year? 26.

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Back to Basics: Investment Asset Classes

Previously in the Back to Basics series, I have written about:

• Back to Basics: Recovering from Negative Returns
• Back to Basics: Asset, Liability, Equity

Today, we shall be perusing at what’s out there and what’s available for us to invest in.

Generally, there are four major asset classes available.

They are:

1. Equity
2. Cash/Money Market Securities
3. Fixed Interest Securities
4. Property

Here are some explanations and examples of the above-mentioned asset classes:

EQUITY MARKET

In the most simplistic sense, equity is another name for stocks or shares.

Examples that come under this category are:

• Malaysian stocks
• Australian company stocks
• Unit trust funds/managed funds/mutual funds
• Foreign stocks

CASH/MONEY MARKET

The money market forms a part of the debt market. Generally, securities traded in the money market have maturity periods of less than 12 months. Maturity basically means, your positions will be exited within the time frame.

Examples:

• Bills of Exchange
  • Bank Bills
  • Treasury Bills
• Promissory Notes
• Certificates of Deposit
• Treasury Notes
• Unit trust fund or mutual funds dealing with money markets

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Risk Tolerance Level: Part 2

This is a continuation of my previous article on risk tolerance level. This time, we will be having a look at real-life examples. A lot of people are sucked in by the potential high-returns that are often matched with aggressive funds. Sometimes, they do not understand what they are diving into. They just look at the rewards factor, not the risk factor. I will be using two products from Public Mutual to illustrate this. Let’s have a look at the first one, Public Asia Ittikal Fund, which is an aggressive fund.

Have a look at the chart below.

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Back to Basics: Asset, Liability, Equity

Alright, let’s talk about the concepts of Asset, Liability, Equity.

We start off with this accounting formula:

Asset = Liability + Equity

To give these terms simple definitions:

Asset: What you control
Liability: How much of that control is not actually yours (yet…)
Equity: How much of that control is yours

Let’s have a look at this example here:

You bought a house worth $100,000 and paid a 10% down payment for it ($10,000). The rest of the amount is financed by a bank.

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Back to Basics: Recovering from Negative Returns

Alright, let’s get back to basics.

If I lose money in my investments, how much do I need to make back? If I lose 10%, does my investment need to go up by 10% to get back to where I was? Let’s have a look at this example:

You invest $10,000 in the share market. The market falls by 10%. Your current investment is now only $9,000. To get back to where you started, you need to make $1,000 right? So:

$1,000/$9,000 = 0.1111 = 11.11%

In other words, you actually need to make 11.11% to get back to where you started.

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Do What You Think is Right

“Do what you feel in your heart is right - for you’ll be criticized anyway. You’ll be damned if you do, and damned if you don’t.”
- Eleanor Roosevelt -

I came across this quote quite a while ago and thought that this is applicable to the journey of wealth-creation.

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Risk Tolerance Level

There is no doubt in my mind that most people wouldn’t mind being rich. There’s also no doubt in my mind that a number of people would be attracted to “High Returns” investment vehicles. However, they often forget about one key point on determining which investment products would be suitable for them. That key point is, risk tolerance level.

I’ve always believed that one must determine their risk tolerance level first before embarking on his/her wealth-creation journey. Understanding risk as a whole and understanding how much risk you are willing to take is really important. You don’t really have to take a university course on this, learning about utility theory, portfolio theory, and etc. (though it would be beneficial), but you need to understand how you would react to the increasing risk of investments.

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The Importance of Cash Flow

A fellow blogger touched this topic in his blog and I thought, I should discuss about cash flow in the context of investments.

I hope by now you are already aware that investing is important. Even though it is important, there is also something that you need to consider. As the title suggests, what I’m talking about is cash flow. When you put your money in an investment, the first thing you’re going to get are capital gains. Second thing is income stream (be it through dividends, rent, and etc.).

Now, when you buy shares for example. It’s great if you get 100% of capital gains per year. However, this gain is not realised until you actually sold your shares. If the company does not give out any dividends at all, effectively, your income from that investment is zero. That means zero cash flow.

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Expensive Trading Courses

I’m going to share with you on what I think about paid trading courses. I haven’t been to one but I’ve read and heard quite a bit of these courses.

There’s a variety of courses out there offering all sorts of things. Some may be relevant to you and some may not be relevant.

First thing you need to know is whether they are teaching you on how to become a trader (i.e. teach you about the market and help you develop your own trading system) or are you paying to for their trading system. If the course is offering the latter, I think your money is worth spent someplace else. Why? Think about this. If the trading system is so good, why would the person sell it to somebody else? Why not keep the “holy grail” themselves and use it to make truckloads of dough? Remember, trading is hard. Persistance and hardwork is key. Taking shortcuts and being spoon-fed are recipes for disaster.

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Beginning your Investment/Trading Knowledge Journey

Stepping into a new territory can be daunting for most people, including myself. This is especially true when I first started my investment/trading journey. The big question of “Where do I start?” comes to mind. I’ll share with you on how I actually started.

Well, where do we start? The first thing you need to do is to know yourself. You need to ask yourself a few questions like:

1. What is your risk tolerance level? Are you a low-risk, medium-risk, or a high-risk investor/trader.

2. What are you interested in? To trade or to invest?

3. What is your time-frame? Are you investing/trading for the long-term or do you need your money back in the next couple of months.

4. Do you have a full-time job or other commitments? If yes, how much time can you commit to your investment/trading venture?

5. What sort of products do you want to be involved with? Properties, shares, derivatives, bonds, mutual funds?

Knowing yourself is imperative to know where to begin learning about investing/trading.

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Investing & Trading. What’s the difference?

People, including myself, get quite frustrated when they get bombarded with different financial terms and theories. In fact, the frustration is enough to deter some people from the investment world altogether. In this post, I’ll try to explain the difference between two key terms of the investment world. They are, investing and trading.

These two might be dealing with the same financial products but they are actually very different. Different meaning and different techniques employed. Let’s talk in the context of shares/stocks where you’ll have share investors and share traders.

Share investors generally buy shares in order to keep them for the long-term. Usually, investors plan to keep the shares that they own for the long-term of 12 months or more. They do this for the capital growth and for the dividend payments. In other words, they employ the buy and hold strategy. The most famous share investor that I can think of is Warren Buffett.

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