Live within your means
Many a times, we forget this simple thing because we are doing well. Just look at America today and you get the answer.
There are many kinds of salesmen out there and I have nothing against them. I am one as well!! You sell the products and services that you believe in, where your core values tell you that it is right. For example, you may not see people who sell soda as ethical because it makes consumers fat.
Just like I hate credit card salesmen. I know of plenty of people who had to declare bankruptcy because of debts. And credit is the root of these problems. Before you point the finger at me for not educating enough consumers on financial planning, review your own spending habits.
Think about it. Our banks are only paying 0.125% interest and that wonderful card that holds the key to your future money is charging 24%. $1000 in the bank becomes $1001.25 and your $1000 bill becomes $1240 after a year. That makes you $238.75 poorer, which also means that you lose 23.88% of your wealth. Think about it.
The greatest challenge is not what we do when we are poor. But what should we do when we are doing well?
Showing posts with label invest. Show all posts
Showing posts with label invest. Show all posts
Saturday, October 09, 2010
Sunday, March 14, 2010
Dollar Cost Averaging - Part 2
I posted on DCA recently (read here)and I was in a similar discussion with a friend but the difference is that we are not talking about funds, but a particular stock.
He told me that if a stock is good, you should not use up all your capital and purchase it at one go, i.e. showhand. It is wise to leave some of your capital so that when the stock drops, you can execute DCA.
So I asked him why is it that since he feels so good about a particular stock, and he is predicting that it might drop? Then he said that it would be naive not to consider market shocks, which means that some adverse news can bring a market down no matter how strong your pick is. True.
Then the real question comes. How do you know that the stock is good? Based on what? Historical price? Business model? Future growth?
Then what? How do I know how much it should be worth (intrinsic value) now? How much should I sell?
Take a look at the chart below. One of the scariest charts of all time... Cosco Corp
So here we address the first question: Picking stock based on historical price. The stock was selling at less than $3 for the first half of 2007, then it went up to $8 in Oct07, which got you so excited and ready to pounce. Less than a year later, it dropped back to $3, so you thought that the perfect time had came. You entered at $3 hoping that it will go back to $8, which will translate into more than 250% return and you can become the first millionaire made in the stock market. So you sell your house and play showhand. $300,000 in, and you are still sitting in a pile of shit today, with a loss of 60%. Too bad, your wife and children have left you.
Next question on DCA. One other stupid man also saw the opportunity. He decided to enter 10% of his wealth first, $30,000 in. One week later the price was $2.50, still convinced that his investment is sound and this time it's cheaper, he threw in another $50,000. 1 month later, price $2, "and this cannot be", he thought to himself, so he decide to dump 30% of his wealth into the sea, $100,000. The average cost works out to be $2.25 only!! "I found gold!"
October 2008, the price officially drop below the $1 mark. And he still believed that your stock is a good pick and the phrase "what goes down must come back up". So he also played showhand - $120,000 of remaining wealth all in. This time your investment really cheap liao, $1.50 per share only. Until today, the stock has never risen back to $1.50. By now I think his wife would have left him too.
I posted on DCA recently (read here)and I was in a similar discussion with a friend but the difference is that we are not talking about funds, but a particular stock.
He told me that if a stock is good, you should not use up all your capital and purchase it at one go, i.e. showhand. It is wise to leave some of your capital so that when the stock drops, you can execute DCA.
So I asked him why is it that since he feels so good about a particular stock, and he is predicting that it might drop? Then he said that it would be naive not to consider market shocks, which means that some adverse news can bring a market down no matter how strong your pick is. True.
Then the real question comes. How do you know that the stock is good? Based on what? Historical price? Business model? Future growth?
Then what? How do I know how much it should be worth (intrinsic value) now? How much should I sell?
Take a look at the chart below. One of the scariest charts of all time... Cosco Corp
So here we address the first question: Picking stock based on historical price. The stock was selling at less than $3 for the first half of 2007, then it went up to $8 in Oct07, which got you so excited and ready to pounce. Less than a year later, it dropped back to $3, so you thought that the perfect time had came. You entered at $3 hoping that it will go back to $8, which will translate into more than 250% return and you can become the first millionaire made in the stock market. So you sell your house and play showhand. $300,000 in, and you are still sitting in a pile of shit today, with a loss of 60%. Too bad, your wife and children have left you.
Next question on DCA. One other stupid man also saw the opportunity. He decided to enter 10% of his wealth first, $30,000 in. One week later the price was $2.50, still convinced that his investment is sound and this time it's cheaper, he threw in another $50,000. 1 month later, price $2, "and this cannot be", he thought to himself, so he decide to dump 30% of his wealth into the sea, $100,000. The average cost works out to be $2.25 only!! "I found gold!"
October 2008, the price officially drop below the $1 mark. And he still believed that your stock is a good pick and the phrase "what goes down must come back up". So he also played showhand - $120,000 of remaining wealth all in. This time your investment really cheap liao, $1.50 per share only. Until today, the stock has never risen back to $1.50. By now I think his wife would have left him too.
The wise one would have spotted it and left that stock alone. He is the one who doesn't buy without looking deep into the company. And he would probably end up sleeping with the two homeless wives.
Note: Life is contradicting. Some methods that should be there to help you destroys you. And remember that wives leave not because you are a lousy stock picker, they leave because you spend all your money on companies that don't make LV bags.
Monday, March 01, 2010
High Dividend Yield Stocks
Before we go into the content, let's look into what the title means. Dividend is a payout that rewards you for holding a share of the company. It is similar to the interest on your bank savings. The difference is that the company can choose not to give any dividend for the year.
The yield on the dividend, is the dividend divided the share price, for instance, a company's share is selling at $2.00, and dividend declared is $0.01 per share, which means the yield is 0.01/2 = 5%.
Is dividend yield important? Of course, that equates to your return on investment. Still don't understand? Imagine now that you hold Company A's stock that costs $4.00 per share compared to Jacky who holds Company Z's stock that costs $2.00. We have the same capital, which means that for every stock you hold, Jacky holds 2 times as much. So when Company A and Z both declare a dividend of 1cent per share, who would be happier? If you still don't understand, I suggest you go back to sleep now.
Ok back to serious business. This week, a number of companies announced earnings for the last financial year, which is also the time they propose dividends to be distributed to shareholders. On average, Singapore listed companies generally yield about 2% on dividend and 4% or more is considered generous.
So, take a look at the latest companies that are cum dividend (CD) currently, computed based on the amount declared for this period. Prices of stock fluctuate, so the denominator is not accurate. Therefore, dividend yield isaccurate to not very accurate.
United Engineers - 4.5%
Sembcorp - 4.1%
Parkway Holdings - 4%
CSE Global - 4%
Rotary Engineering - 3.8%
Allgreen Properties - 3.6%
ST Engineering - 3.3%
SembMarine - 2.9%
UOL - 2.5%
Haw Par Group - 2.5%
Hong Leong Finance - 2%
Sing Holdings - 1.8%
ComfortDelgro - 1.8%
Golden Agri - 0.93%
SC Global - 0.85%
City Developments - 0.78%
Take note: Dividend yield computed is based on the most recent report, which may be dividends declared for the quarter, and may NOT be the dividend yield for the entire year, because I am not so free to find the data and I don't hold a dividend paying stock for so long. Call me myopic.
Important: Please do not take this as a stock recommendation. Life doesn't work based on one factor. Even when using dividend yield, you must also know when is the CD and XD dates and the effect on stock prices on these two crucial dates. More will be shared after you have lost money. Good luck and have fun.
Before we go into the content, let's look into what the title means. Dividend is a payout that rewards you for holding a share of the company. It is similar to the interest on your bank savings. The difference is that the company can choose not to give any dividend for the year.
The yield on the dividend, is the dividend divided the share price, for instance, a company's share is selling at $2.00, and dividend declared is $0.01 per share, which means the yield is 0.01/2 = 5%.
Is dividend yield important? Of course, that equates to your return on investment. Still don't understand? Imagine now that you hold Company A's stock that costs $4.00 per share compared to Jacky who holds Company Z's stock that costs $2.00. We have the same capital, which means that for every stock you hold, Jacky holds 2 times as much. So when Company A and Z both declare a dividend of 1cent per share, who would be happier? If you still don't understand, I suggest you go back to sleep now.
Ok back to serious business. This week, a number of companies announced earnings for the last financial year, which is also the time they propose dividends to be distributed to shareholders. On average, Singapore listed companies generally yield about 2% on dividend and 4% or more is considered generous.
So, take a look at the latest companies that are cum dividend (CD) currently, computed based on the amount declared for this period. Prices of stock fluctuate, so the denominator is not accurate. Therefore, dividend yield is
United Engineers - 4.5%
Sembcorp - 4.1%
Parkway Holdings - 4%
CSE Global - 4%
Rotary Engineering - 3.8%
Allgreen Properties - 3.6%
ST Engineering - 3.3%
SembMarine - 2.9%
UOL - 2.5%
Haw Par Group - 2.5%
Hong Leong Finance - 2%
Sing Holdings - 1.8%
ComfortDelgro - 1.8%
Golden Agri - 0.93%
SC Global - 0.85%
City Developments - 0.78%
Take note: Dividend yield computed is based on the most recent report, which may be dividends declared for the quarter, and may NOT be the dividend yield for the entire year, because I am not so free to find the data and I don't hold a dividend paying stock for so long. Call me myopic.
Important: Please do not take this as a stock recommendation. Life doesn't work based on one factor. Even when using dividend yield, you must also know when is the CD and XD dates and the effect on stock prices on these two crucial dates. More will be shared after you have lost money. Good luck and have fun.
Sunday, February 07, 2010
Dollar Cost Averaging
This is a concept used in investing, more eminent in insurance where policyholders do a regular monthly investment plan. Dollar Cost Averaging (DCA) is useful when the price of asset (or apples, if you like) fluctuate and when you are not sure of future prices.
An example of the above two conditions is the stock market. Over the long term, prices should be on the uptrend, the same way you pay for the same fishball noodles, but prices are subject to "noise", which means it will shift up and down of the fair value in the short term. For example, the fair value of apples is $1, then suddenly an apple hits Isaac Newton's head, and it goes for $2 the moment after. Or there is news saying that in actual fact it's a mangosteen a day that keeps the doctor away, resulting in apples selling for $0.50. So that is the lousy example I came up with.
Now back to serious business.
Take a look at the chart. Assuming you are an investor and the time now is 2004. The right side of the chart is blank. You decide to split your investment into five years from 04 to 08. And you retire in 09. The prices at the beginning of the years are $1.10, $1.20, $1.60, $2 and $2.60 respectively. The average cost works out to $1.70. Unfortunately nobody retired willingly in 2009 cos the price plunged to $1.60 and you made a loss of $0.10 in your investment.
But you happened to know another investor who made one lump sum investment into the same fund in 2007, when the price was $2. He also wanted to retire in 2009. But he played a wrong game of showhand and he had to work harder than you now cos he didn't know the concept of DCA.
Note: The chart shown is taken from Great Eastern's official website, and the fund is Enhancer, one of the best performing funds of all time. Morningstar rates it 5 stars. The 5-year compounded return is 12.47%, which means that a $10,000 investment would have grown to $17,989. More info here.
This is a concept used in investing, more eminent in insurance where policyholders do a regular monthly investment plan. Dollar Cost Averaging (DCA) is useful when the price of asset (or apples, if you like) fluctuate and when you are not sure of future prices.
An example of the above two conditions is the stock market. Over the long term, prices should be on the uptrend, the same way you pay for the same fishball noodles, but prices are subject to "noise", which means it will shift up and down of the fair value in the short term. For example, the fair value of apples is $1, then suddenly an apple hits Isaac Newton's head, and it goes for $2 the moment after. Or there is news saying that in actual fact it's a mangosteen a day that keeps the doctor away, resulting in apples selling for $0.50. So that is the lousy example I came up with.
Now back to serious business.
Take a look at the chart. Assuming you are an investor and the time now is 2004. The right side of the chart is blank. You decide to split your investment into five years from 04 to 08. And you retire in 09. The prices at the beginning of the years are $1.10, $1.20, $1.60, $2 and $2.60 respectively. The average cost works out to $1.70. Unfortunately nobody retired willingly in 2009 cos the price plunged to $1.60 and you made a loss of $0.10 in your investment.
But you happened to know another investor who made one lump sum investment into the same fund in 2007, when the price was $2. He also wanted to retire in 2009. But he played a wrong game of showhand and he had to work harder than you now cos he didn't know the concept of DCA.
Note: The chart shown is taken from Great Eastern's official website, and the fund is Enhancer, one of the best performing funds of all time. Morningstar rates it 5 stars. The 5-year compounded return is 12.47%, which means that a $10,000 investment would have grown to $17,989. More info here.
I am an authorised agent qualified to give advice on funds specialising from bonds to sector-specialised equity. If you are interested to start a monthly investment plan, leave me a message but I can't guarantee that I have time. Just kidding.
Tuesday, February 02, 2010
Wednesday, January 27, 2010
Saturday, January 09, 2010
Rule of 72
Last week, we discussed about the power of compounding, which of course, more is better and if the frequency of the compound is higher, the more money for you to put in the pocket.
Today, I will introduce a tool for you to compound your growth: The rule of 72.
Apparently, Albert Einstein is the owner of this rule and what it says is that by taking 72 divided by the interest rate, that will be the number of years needed for your money to double. Amazing, isn't it?
The effect of compounding can actually be represented by a mathematical function called e, the exponential function. People are always interested to find out how long it takes to double their money, so this is a useful tool to use.
Again, for illustration purposes:
Suppose the bank pays you 0.5% interest every year. Take 72 divide by 0.5 and you will know that you won't get to see your money double in this lifetime.
Similarly, if there is an investment that promises 10% per year, you will get two times your money in approximately 7 years. But before you dump all your money into that unknown Ponzi scheme, please be assured that there is no investment that promise they won't lose any of your money. If you manage to find one, please leave a message cos I want to invest too.
Your writer is lousy in english. So he is trying to put things as simple as possible.
Last week, we discussed about the power of compounding, which of course, more is better and if the frequency of the compound is higher, the more money for you to put in the pocket.
Today, I will introduce a tool for you to compound your growth: The rule of 72.
Apparently, Albert Einstein is the owner of this rule and what it says is that by taking 72 divided by the interest rate, that will be the number of years needed for your money to double. Amazing, isn't it?
The effect of compounding can actually be represented by a mathematical function called e, the exponential function. People are always interested to find out how long it takes to double their money, so this is a useful tool to use.
Again, for illustration purposes:
Suppose the bank pays you 0.5% interest every year. Take 72 divide by 0.5 and you will know that you won't get to see your money double in this lifetime.
Similarly, if there is an investment that promises 10% per year, you will get two times your money in approximately 7 years. But before you dump all your money into that unknown Ponzi scheme, please be assured that there is no investment that promise they won't lose any of your money. If you manage to find one, please leave a message cos I want to invest too.
Your writer is lousy in english. So he is trying to put things as simple as possible.
Saturday, January 02, 2010
The Power of Compounding
Compounding is really a basic term that we encounter in our day to day life. It doesn't take a scientist or a financial expert to explain correctly what compounding means. This is what growing money means. Compounding will ensure that your $1 today will be worth more tomorrow and even more the day after.
A simple illustration:
You invest $100 in a financial instrument called bank deposits. It promises 1% interest every year and they pay at the end of each year.
End of the year we will all celebrate the welcome the new year, and at this time, the bank pays you $1 on your $100 (1% of $100 = $1), and they too, went on to celebrate their bonus for the year. So being somemore who haven't used a single cent in that account, you have $101.
One more year and the whole cycle repeats itself. You are still happy and nothing changes except for your account. The bank is sad cos they have to pay you $1.01 for interest this time. You have $102.01!
Of course, I am using this example to mock at you for leaving that $100 in the bank since he doesn't withdraw it to use. He can put it into a better purpose called investing.
Now suppose the returns (interest) is 10% instead of 1%. End of year 1 will be $110 instead of $101, and end of year 2 will be $121 instead of $101.10. You decide for yourself which one is more.
From today onwards, after celebrating the enterance of year 2010, I will be sharing something every week, be it investment knowledge, study advice or whatever nonsense. But I am good at none of these.
Compounding is really a basic term that we encounter in our day to day life. It doesn't take a scientist or a financial expert to explain correctly what compounding means. This is what growing money means. Compounding will ensure that your $1 today will be worth more tomorrow and even more the day after.
A simple illustration:
You invest $100 in a financial instrument called bank deposits. It promises 1% interest every year and they pay at the end of each year.
End of the year we will all celebrate the welcome the new year, and at this time, the bank pays you $1 on your $100 (1% of $100 = $1), and they too, went on to celebrate their bonus for the year. So being somemore who haven't used a single cent in that account, you have $101.
One more year and the whole cycle repeats itself. You are still happy and nothing changes except for your account. The bank is sad cos they have to pay you $1.01 for interest this time. You have $102.01!
Of course, I am using this example to mock at you for leaving that $100 in the bank since he doesn't withdraw it to use. He can put it into a better purpose called investing.
Now suppose the returns (interest) is 10% instead of 1%. End of year 1 will be $110 instead of $101, and end of year 2 will be $121 instead of $101.10. You decide for yourself which one is more.
From today onwards, after celebrating the enterance of year 2010, I will be sharing something every week, be it investment knowledge, study advice or whatever nonsense. But I am good at none of these.
Sunday, December 20, 2009
Thursday, December 17, 2009
Trading
Two months ago on Oct 9, I keyed in my first stock trade into POEMS, the online trading platform by Phillip Securities. I didn't expect that at the age of 24 with such financial standing, I am able to own a stake in companies which I haven't even seen physically before. Nonetheless, with some knowledge learnt in school, I decided to put it in practice.
Unfortunately for me, I was too eager to multiply my money and took some wrong advice, I bought some lousy stocks. The worse thing was that I thought I was right after doing my own analysis. Luckily, the loss was less than 15% and I am still holding to some today. I think they will be profitable in months to come. I hope I am right.
Now, slightly more than two months later, I upgraded to a more sophisticated financial instrument called Contract for Difference (CFD). The function is the same, just that it gives you leverage. And this trading platform that I am using is able to give me as much as 10 times leverage on my trades.
What is leverage? Leverage is also known as "gearing", which is a term more oftenly used in British context. Imagine a see-saw, but this see-saw is not pivoted in the centre. Instead, it is much nearer to one end. Now you sit on the end nearer to the pivot and it tips. Do you need somemore of the same weight to sit on the other end in order for it to balance? Well, I guess you don't need to go to school for this, just go to the playground and you will get the answer.
Leverage works like this. You use a little bit to get a lot. A leverage of 10 times would mean that $10 of your money can give you $100 of something else. However, it is a double-edged sword. We have to realise that if we spend all the money compared to no leverage, which in other words mean that instead of buying just 1 LV bag that you can afford, you buy 10!! The win/loss is magnified by 10 times. However, it lets you own something that you have never dreamed before, given your financial standing. (On the side note, we know that the example on LV is a lousy one, because there is no win when you buy stupid things like expensive bags)
Indeed, such investments are risky, therefore risk management comes into play. This also means that one has to be disciplined. If you know that you are losing, then you better know when to get out and at what kind of price. For all you know, the stock might never rise to your breakeven price again. Also, with leverage, there is a need to set aside more capital to cushion losses.
On the positive side, most companies are geared in one way or another. They borrow money so they can invest in equipments (input) to produce items that they can sell (output) for a profit. Of course, if people borrow money to use and not to generate profit, that kind of person is really a moron. Not forgetting that you still have to pay interest on the loan.
So, if you want to try your hand at stocks, make sure you choose the right instruments and the right people with the right kind of experience to give you advice. You wouldn't want a big time casino gambler to give you advice, do you?
Your writer here is a trained financial personnel, both in school and financial planning. However, his experience in investments is only limited to two months.
Two months ago on Oct 9, I keyed in my first stock trade into POEMS, the online trading platform by Phillip Securities. I didn't expect that at the age of 24 with such financial standing, I am able to own a stake in companies which I haven't even seen physically before. Nonetheless, with some knowledge learnt in school, I decided to put it in practice.
Unfortunately for me, I was too eager to multiply my money and took some wrong advice, I bought some lousy stocks. The worse thing was that I thought I was right after doing my own analysis. Luckily, the loss was less than 15% and I am still holding to some today. I think they will be profitable in months to come. I hope I am right.
Now, slightly more than two months later, I upgraded to a more sophisticated financial instrument called Contract for Difference (CFD). The function is the same, just that it gives you leverage. And this trading platform that I am using is able to give me as much as 10 times leverage on my trades.
What is leverage? Leverage is also known as "gearing", which is a term more oftenly used in British context. Imagine a see-saw, but this see-saw is not pivoted in the centre. Instead, it is much nearer to one end. Now you sit on the end nearer to the pivot and it tips. Do you need somemore of the same weight to sit on the other end in order for it to balance? Well, I guess you don't need to go to school for this, just go to the playground and you will get the answer.
Leverage works like this. You use a little bit to get a lot. A leverage of 10 times would mean that $10 of your money can give you $100 of something else. However, it is a double-edged sword. We have to realise that if we spend all the money compared to no leverage, which in other words mean that instead of buying just 1 LV bag that you can afford, you buy 10!! The win/loss is magnified by 10 times. However, it lets you own something that you have never dreamed before, given your financial standing. (On the side note, we know that the example on LV is a lousy one, because there is no win when you buy stupid things like expensive bags)
Indeed, such investments are risky, therefore risk management comes into play. This also means that one has to be disciplined. If you know that you are losing, then you better know when to get out and at what kind of price. For all you know, the stock might never rise to your breakeven price again. Also, with leverage, there is a need to set aside more capital to cushion losses.
On the positive side, most companies are geared in one way or another. They borrow money so they can invest in equipments (input) to produce items that they can sell (output) for a profit. Of course, if people borrow money to use and not to generate profit, that kind of person is really a moron. Not forgetting that you still have to pay interest on the loan.
So, if you want to try your hand at stocks, make sure you choose the right instruments and the right people with the right kind of experience to give you advice. You wouldn't want a big time casino gambler to give you advice, do you?
Your writer here is a trained financial personnel, both in school and financial planning. However, his experience in investments is only limited to two months.
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