SALLY KLAUS AND HER FINANCE IDEAS:
FINANCIAL MANAGEMENT: WHAT THE RICH DO IN A DOWN MARKET
Part 4
Here we continue the financial management series with more ideas on how to become rich.
Mix and don’t match
In investment and asset allocation, plaids do go with stripes. What goes up must come down and vice versa. What do these strange aphorisms mean? Applied to investments, the concept of mean reversion states that, after a period of several investment cycles, most financial asset returns will tend to generate their long term average investment returns. This is best illustrated with a concrete example for understanding. For example, Japanese equities’ returns in the mid to late 1980s were far greater than their long term average and at some point it became increasingly likely that they would revert to their mean returns by producing returns that were near to their long term average.
All we have to do is to watch the numbers because numbers don’t lie. The whole point of asset allocation and investing is to protect your capital and earn a satisfactory return. Your investment return may come from dividends or interests or appreciation of investment assets in real estate or stocks. Some returns from some financial asset classes are fixed in amount while others are less predictable and more market dependent.
Our minds - our selves – do not be your own enemy
One of our investment pitfalls is that we suffer from varying degrees of overconfidence. We think we are better at something than we actually are. Stereotyping ourselves sometimes limits our views to possibilities and opportunities. Many people, when they have made some money from the stock market, think they are investment geniuses and forget that they may only be lucky for once. There is a need to know that we must not confuse investment luck with investment skills.
It is okay to get lucky, but don’t assume a lucky financial gain can be repeated because you are “so smart”. Sometimes being smart was not the cause of the lucky financial gain. The market is in fact not controlled by one person or a group of people. Mistakes can be made by being inflexible, and stubbornness can sometimes really make you pay. We need to be aware of what the behavioral finance types call framing. Framing is simply how we look at our investments. When we get a phone call about our investment idea involving some new wonderful boom-bang investment, do we get caught up in the excitement without considering how it affects our overall investment plan?
Do we know what exactly is happening financially and how well we know the financial developments?
We need to be realistic in our approach to investing. Be methodical and careful in your investment approach. Do your homework. Keep the short term business news in perspective and focus on the big picture. Know your investment weaknesses as well as your investment strengths. When you hear about a new idea that sounds interesting or exciting, ask how it fits in with your plan. Remember all the earlier materials that we covered in the other sections of this financial series? Your plan may not be the same as your neighbour’s or your family member’s plans. By focusing on your goals, avoiding highs and lows of your emotions you can structure and manage your asset allocation plan to take advantage of others’ emotions and mental mistakes instead of getting them richer because of your mistakes!
End of fourth part of this “financial ideas” series
Special thanks to Sally Klaus and her valuable contributions to my finance, investment and money blog. More to come from Sally Klaus in future posts; stay tuned!
Ideas on how to become rich!
Ideas on how to become rich - Financial Management - what the rich do in a down market, part 4
Ideas on how to become rich: Financial Management - what the rich do in a down market, part 3
Ideas on how to become rich: Financial Management - what the rich do in a down market, part 3
SALLY KLAUS AND HER FINANCE IDEAS:
FINANCIAL MANAGEMENT: WHAT THE RICH DO IN A DOWN MARKET
Part 3
Welcome back. In this part of financial market survival strategy, we delve into the subject further. There are two strategies to win the battle for investment survival: (A) a long term investment focus (strategy) and (B) a short term investment focus (tactics). It is commonsense to use the current financial environment to keep the big picture of investment in focus.
A strategic focus means looking at long term financial assets because there are many investments which take a long time to come to pass. It is like playing chess with the final checkmate in mind ultimately for the opponent. You need to see the end before even starting the investment game.
Assets such as real estate, mutual funds or even insurance schemes are for strategic investment purposes, because these take a long term investment perspective. It is our investment journey’s final destination; where do we stop for a rest eventually?
Use tactical financial plans which are the moves like tactical chess – moving the pawns first, one at a time. It is like a traveler who has to pause at stops along the long journey. Short term assets are useful for shifts in any financial market movements or asset valuations. When it is deemed appropriate to do so, you should execute various tactical asset allocation shifts by moving financial assets in convenient parking lots for you to manipulate short term financial movements.
The key thing is to be prepared for investment changes and financial market movements as the world is very volatile these days with economic, political and financial changes taking place almost daily.
Another point to note is: do you know where you are going? Every one of us needs a road map to check our direction and also to ensure we are moving in the correct path. Are you more afraid of losing money or missing out on an opportunity? What is your investment personality, once again? This is not a simple question but one that needs to be successfully answered. To successfully establish a portfolio, you have to take some time to get to know yourself and your money making goals. You need to honestly evaluate your financial conditions and the kind of investment goals or money making personality you have.
Do you plan for your children’s education or do you plan for a resort style living after retirement? Each of us has ideas of what we want our money to do, and how to do it, and how money making is important or not so important for us, so if you are going to need money in two to three years’ time, then you must automatically rule out certain long term financial assets, as you probably have no time to wait for them to give you investment returns.
For teenagers, five to ten years may seem a long time to wait but for a working professional in his 30 or 40s, these sorts of years are not a long term thing. You have to deal with risk factors, tax factor and also the investment returns you are envisaging for the next few years. There are many factors to consider!
The key reminder is to ask yourself: do you have enough money for a rainy day?
End of third part of this “financial ideas” series
Special thanks to Sally Klaus and her contributions to my finance, investment and money blog. More to come here on this site on Ideas on How to Become Rich; stay with me. Thanks and cheers.
Ideas on how to become rich!
Ideas on how to become rich: Financial Management - what the rich do in a down market, part 2
Ideas on how to become rich: Financial Management - what the rich do in a down market, part 2
SALLY KLAUS AND HER FINANCE IDEAS:
FINANCIAL MANAGEMENT: WHAT THE RICH DO IN A DOWN MARKET
Part two
Building your house
Your investment portfolio needs to reflect your personality. It is like buying a house with different rooms, for different purposes. Make sure your financial assets in your investment portfolio suit your personality, just as furniture suits your individual style and room design.
People have varying motivations and reasons for having investments and financial assets. These investment motivations and emotions could range from greed to fear, from comfort to excitement, the need to make money or the urge to make a quick buck, long term and short term goals …
Asset class ... and
Represents investors’ quest for...
Cash
safety and liquidity
Bonds
Income , reliability, predictability
Stocks
Ownership, value creation profits
Real estate
Tangibility, ownership, income and ego
Commodities
Exposure to price moves and human needs
Precious metals
Purchasing power protection, hedging
Venture capital
Capital growth, control over corporate destiny
Mutual funds
Trend exploitation, protection against market turbulence
Hedge funds
Finding and taking advantage of inefficiencies
Inflation – indexed securities
Inflation hedging and pp protection
Art
Prestige, ego, income and intellectual affirmation
Reminder: match the investment to your financial goals and personality.
Combining dreams into a plan
Your investment plan should be as specific and individual as your dreams. Many of us invest in certain assets because of what they can do for us. Most want their money safe from inflation or turbulence, and also want to fulfil their dreams of a possible future “good life”, which quite often requires a lot of money!
There are many objectives for investors.
The first is protection against the effects of inflation. When inflation rates soar, stocks may tend to get hurt. The rising costs of borrowing and doing business may make it difficult for them to grow faster than the inflation rate. In addition, many of the stocks tend to follow a certain trend.
The second reason for owning stocks is that we want to gain exposure to profitable companies and overall economic growth. In the long run, owning equity assets give us the investment opportunity to profit from economic growth .
Third reason is that we want some sort of investment return – to get paid for the hard work and our money. It is thus best to include dividend paying stocks, preferred stocks and REITs – real estate investment trusts. This is to protect you in the case of turbulence and times of crisis.
Many people own stocks because they want to ensure profitability as well as liquidity. But never use long term assets for short term investment goals and vice versa.
End of second part of this “financial ideas” series
Special thanks to Sally Klaus and her invaluable contributions to Ideas on How To Become Rich! Stay tuned for more financial and investment ideas, thanks and cheers!
Ideas on how to become rich!
Ideas on how to become rich: Financial Management - what the rich do in a down market, part 1
SALLY KLAUS AND HER FINANCE IDEAS:
FINANCIAL MANAGEMENT: WHAT THE RICH DO IN A DOWN MARKET
NB To my loyal readers, I am back from a long Economics examination period, and have completed my economic research on global capital flows. I might make it available here online for research purposes if the paper is released. Here is a series on financial management by Sally Klaus, my loyal reader, who contributes many good ideas and excellent materials for my Ideas on How To Become Rich site. Thanks for reading and cheers.
Each of these following financial rules would be discussed in future posts and in detail one at a time…
Don’t let your financial or money making plan be an accident
Everyone needs an “Uncle Frank”
Building your house
Combining dreams into a money making plan
Two strategies to win the battle for investment survival
Do you know where you are going?
Mix and don’t match
Our minds; our selves
The jockey matters as much as the horse
Riding out the storms
Building your house on rocks
7 quick ways to ruin
Take the road less travelled
Who are you?
What works for you?
Don’t let your plan be an accident
Asset allocation and asset planning are very important in the life of an investor. What is asset allocation or asset planning? First, you have to ascertain what kind of financial assets you want to invest and keep in terms of ranking such as how much cash you need, stocks you want to invest, unit trust, real estate, inventory etc…
It is not only to find out those financial assets that can grow, but furthermore that allocation is to find financial assets that will help you to have a balanced investment portfolio.
As the saying goes, it is not wise to put all the eggs in one basket, hence, it is thus vital for us to have many little baskets or few eggs in each basket so that at any time, we have both financial liquidity and profitability.
What kind of financial allocation or financial planning will depend on your financial goals in life, your financial circumstances and your personality. Today we are more fortunate in that we are exposed to a host of advisory and information from media and internet etc… unlike the investors in the past. It is thus easy for us to find out information very quickly and this will enable us to make quick decisions.
Think of the money or financial assets you have as players in your football team. Each has its strengths and weaknesses. You have your game plan. You know what you need from each player. So you need to think of the behaviours of each player before you make decisions to hold how many stocks, bonds, cash, or buy a piece of real estate.
So if you want to play offensive, you have to take advantage of economic conditions to buy certain financial assets or securities which are of higher returns or perhaps even inflation protected securities.
Since changes are fast and furious, your financial decisions have to be reevaluated now and then in response to market conditions so as not to be caught unawares.
One of the most fundamental elements of financial asset allocation is diversification. True diversification involves having several distinct kinds of asset classes that perform differently from each other in different kinds of economic or financial environments.
Some investments such as commodities or metals may thrive in a high inflation environment but others such as bonds or treasury bills or even mutual funds excel in a more deflationary environment.
Diversification will not only make the financial portfolio less volatile, it will also make your reaction to the state of financial markets more stable and less anxious.
Risk awareness allows us to ensure that we have discipline and also gives us the staying power to ensure our investment goals become a reality.
Everyone needs an uncle Frank – this idea means that we all need mentors or advisors, especially financially or investment wise
It is always a good idea to hear another’s views or opinions of financial markets, especially someone who is an expert or experienced in financial planning or financial markets. Knowledge is power and thus this person can help you to tone down your risk or quicken your steps in that he or she can help analyse luck and skills in investment successes.
Having a mentor also enables us not to make rash decisions or prevents us from becoming overly confident as he may play devil’s advocate and give you another side of the story. A good mentor will help you make better decisions because two heads are always better than one. It is also safer to travel in twos.
End of first part of this financial ideas series
NB special thanks to Sally Klaus and her contributions to Ideas on How To Become Rich – finance, investment and ideas site
