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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
- Vanilla
investments: Through most banks and/or brokerage firms
- Funds:
Investment Banks
- 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.
