What happens when you get thrown into the deepest end of the pool?

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Saturday, April 16, 2011

[Update 6] Evaluating Risk

This is possibly why majority of people 'invest' in the wrong stuff and lose money. They didn't evaluate the risk before jumping in, worse off, they don't know what to do. So what should you be looking out for?


1stly, Ask yourself the question: "Do I want to invest?" Because I meet many people who have not even figured this part out yet. So they spend their time being half-hearted, go around listening to bits and pieces of information here and there, procrastinating and looking in envy when they see other people make money.
More often than not, they end up committing to investments based on emotions and the strong salesmanship of the sales personnel.
So if and when you have decided that you want to invest, just like riding a bic or driving a car, LEARN.


2. Understand that in investments, it is not about what you want to do in the market, it is about what the market gives you. And when market gives, you gotta learn how and when to take. Unless you are big enough to manipulate markets, this applies to YOU. Every novice investors comes to the game with big dreams of what they want to earn in the market. "I want 10% returns, I want 20% returns....etc" Some have their journey cut short even before they begin, others go down a path of winning little and losing big...Very bitter experience. Talk to seasoned investors, what they are most bothered about is their downside. They are thinking "I want to do everything possible to ensure that I do not lose money."


3. Take care of the downside, let the upside take care of itself. Why restrict your earnings to 10-20% returns? The sky is the limit! Have a plan in place to protect yourself when things go south.


4. Take a step back and look at investments in smaller numbers. Investments usually involve quite a sum of money, as such it can get quite personal and people tend to get emotional. This is after all your hard-earned money. DON'T. By being emotional, you are doing yourself the biggest disadvantage in investments. Leave the heart for relationship matters. But huge sums of money, many zeros, can drive people CRAAZZY! So either look at it on the merits of the investments alone and block out the amount portion or to look at it in terms of small insignificant money. It will help you clear your mind.


5. Understanding Risk/Reward ratio.
a. Give an example: (Notice I always like to talk in very small numbers) 1sqft of Property A cost $1 and 1sqft of Property B cost $10. By looking at cost alone, everyone would prefer Property A.
But what if I were to tell you that the value of Property A decays at the rate of 10% per year every year and Property B appreciates at 10% per year every year, which would you then prefer?
So to understand investments, don't look at cost price alone. Look at the entire picture of the investment


b. Another example: Investment A offers 50% returns, Investment B offers 10%, again if by looking at returns alone, everyone would opt for Investment A.
But what is the time line? Investment A offers 50% (Capital gains) returns but with an indefinite timeline, Investment B offers 10% (Yield) pa. Now which one is the better investment?


6. As an investor, what you are really trying to do is lower your risk and maximize your returns. That's why for many people when they graduate, they look for a ...??
a. Investment
b. Job


Your intrinsic thought process (Your brain's protective function) already told you, risk none of your own money, derive as much as possible from that source. But, what the problem with JOB? (Next post.)


7. Get Financially Educated and learn proper Money Management. A lot of people get Technical and Professional Education, for them to get a job and earn loads of money. BUT they don't know how to manage money and squander it all away or even worse, rake up huge amounts of Credit card debts, leading to financial problems. I will talk about Financial Education and Money management in my next post.


8. Investment is about opportunity, rather than timing. It is actually a pretty boring thing to do. Put the money issues aside or look at it in insignificant amounts, get Financially Educated, LEARN, apply a fixed set of rules over and over again... & When you see Opportunity....Take It! Take Action...If you procrastinate, opportunity may fleet by you, when lost, it may never return. But don't worry or be envious, there will be other opportunities. Be concerned that you continue to sit on the fence and expect 'magic' to happen, only to find one day years have passed, opportunities have passed then it's really too late..


Until next time.


Your Fellow Investor,
Martin Sim


Previous Updates
5 Why is ‘Playing Safe’ the riskiest thing you can do with your money?
4 Inflation hits highest level since 2008
3 Why you MUST Invest!
2 Are you your parents' financial photocopy?
1 Taking retirement into your own hands




More technical reading you might like
http://www.axa-equitable.com/investments/evaluating-investment-risk.html
http://www.investopedia.com/articles/stocks/08/country-risk-for-international-investing.asp
http://www.taipanpublishinggroup.com/tpg/smart-investing-daily/smart-investing-091010.html
http://fc.standardandpoors.com/sites/client/tda/tdap/article.vm?siteContent=5189&topic=5034

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