FINEX Gym Session 4: The Investment Engine

FINEX Gym Sessions are regular gatherings of individuals extremely passionate about learning how to manage their own finances through sharing by invited experts and the participants themselves. It is by invitation only! Hence, if you are interested, drop me a message, and I will invite you to the next session!

Blog Post of the FINEX Gym Session Session 4: The Investment Engine

In layman terms, Budgeting is about knowing where your money goes, Financial Planning is about Wealth Protection, and Investment would be about Wealth Creation/Growth.

The investment engine helps investors grow their wealth, with the additional resources they might have, after accounting for their daily needs, liabilities and wealth protection expenses.

However, many individuals are often afraid of investing, or even go so far as to equate it to gambling. Hence, the question, what is the difference between gambling and investing?

Well, Bryan our speaker for the day, made a great distinction between the two. He says, “It all comes down to Purpose.”

While in Gambling, we do it for fun; in Investing we do it to grow our wealth.

Therefore, it is critically important that investment decisions, ought to be backed by a sound decision making process.

As such, we should first and foremost be aware that we ought not all to aspire to become experts in investing. But accept this fact, and seek out professionals to help you out in making decisions, if you do not have the interest or the time to monitor your own investments.

That being said, we still ought to have the knowledge and awareness of economic conditions, so to be asking the right questions and help make better decisions of the type/mix of investments we want to have. As even if you engage a financial advisor, the onus of making final decisions should be rested upon yourself, as the success or failures of your investments will eventually affect you the most, and not that of any other parties.

How do you know whether your financial advisor knows what he is doing?

3 basic questions to help you identify if your financial advisor has your interest at heart, and is sufficiently competent in handling your wealth:

1. Where are we in the market today?

·         If your financial advisor is unable to answer this, then he may not be your best choice to work with.

·         Financial advisors must be aware of the economic conditions, so to know the risks and rewards that are presented to each investment vehicle, in order to make sound advises on what the client should do with their money.

2. Given my investment objective, what should I do?

·         Our investment decisions should be backed by our investment objective.

·         Know your risk appetite and time-horizon of how long/short you plan to hold your assets in each investment vehicle.

3. What will perform well under these economic conditions?

·         Certain investment products may perform better in certain economic conditions (Cycle).

·         Be aware of the drivers of different investment vehicles, so to make better judgment on the prospects of your investment decisions.

Different ways to participate in different investment vehicles

1. Vanilla investments: Through most banks and/or brokerage firms
2. Funds: Investment Banks
3. Derivative: Trading of CFDs through banks and/or brokerage firms (Beware of margin call risks)

If we want to be conservative and yet still profit from the stock market, should we simply invest in Blue-Chips?

No. Blue chips are expensive, but stable. However, although dividends may be relatively consistent, their stock price fluctuations have historically proven to be unable to provide great returns.

Diversification

In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents.

Diversification helps you to balance your portfolios, and enable you to possess a variety of asset classes that have different risks/rewards potentials.

Following general trends for making investment decisions

Generally works with a long time-horizon.

S&P index trends have historically reflected to be on an upward trend.

However, historical trends are not definite prove of future trends.

For example, the 10-year horizon for Japan’s stock prices has yet to ever reach a new high since 10-years ago.