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Posts Tagged ‘Cash’

Consider Ethics

Consider Ethics

My dear friends. I understand that some of you might have reservations about my previous article’s suggestion to raise capital for investments from family and close friends. Some voiced concerns that it is bothering on being unethical as we are placing our loved ones’ hard earned cash at risk at 0% interest rates.  Logically, compared to taking a loan from anyone to buy luxury items like a car or to go on a holiday, borrowing to invest is extremely ethical.

 

If this still bothers you, and that you strongly believe in no free lunches, here are some suggestions to structure a loan program from family and close friends that I am personally using.

 

1. Matching Funds – To build trust, place a dollar for every dollar you loan into a fund pool. The fund should then be used only for investments and not allowed to be withdrawn unless mutually agreed with your debtors.

 

2. Attractive Interest Rates – give interest rates better than any fixed deposit but lower than prevailing loan rates. For me, I figured I was able to give 4% interest based on amount invested with me.

 

3. Capital Guarantee – I guarantee the capital invested along with the interest rates agreed. So in the event my investments fair poorly, I am still obligated for my pay outs. Hence the burden to perform is on me.

 

4. Annual Cash Out – all who invested has a chance to cash out once a year with no questions asked. But only once a year. On the flip side, they must stay with the fund for at least 1 year minimum.

 

 

Having the loan approved is only the beginning. The following instructions are harder to manage with these family linked debtors. However, if you can adhere to them, you will go a long way:

 

1. Invest wisely– this is your responsibility given the generosity of your loved ones. This also imply taking it like a man and do the right thing! No lazy investor ever got rich. Do your homework and have loads of patience.

 

2. Report performance yearly and no sooner – While this seems to run contrary to point 1, this is not so. All good intentions are often ill timed. So you owe it to them to focus on your investments and not be distracted by constant nagging from them. While they may operate on herd mentality, you need to be Joe cool under all circumstance to see opportunities others missed.

 

3. Pay out what you promised promptly – You do not know what lengths your family may have gone through just to raise that capital for you. It should be up to them to decide if they want to re-invest or enjoy the dividends. This is also a matter of trust. Deal fairly.

 

Thus with this method, I managed to build a fund for investing with relatively cheap cost of money with a very clear responsibility structure that builds mutual trust and understanding.

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Money No Enough

It was over a nice relaxing coffee session with a good friend of mine that we happen to chance on the topic about investments.  I was rather animated and very excited (probably compounded by the fact I just had a double shot of espresso) about the great variety of bargain stocks currently available.  She sighed and lamented the fact that she was saving for a house and thus had little spare cash to invest.

Raising the Titanic

Raising the Titanic

Somehow I get the feeling that raising capital is a serious barrier to getting into equity investments.  I calmly said it was never “Money No Enough”, but rather “Not Enough Effort”.  My friend then had a look on her face that implied that raising the Titanic was probably a much easier feat than raising capital!  In order to repay my friend for a cup of coffee she so generously paid for me, I decided to share how easy raising capital can be.

Here are some methods to consider:

  1. Personal Savings (0% interest rate) – Take 10% of your current savings to invest.  It should be used rather than allowing it to sit idle in the banks drawing a miserable 0.2% annual interest rate and suffering losses from inflation.  Seriously, most folks can hardly notice a difference with 10% less in their cash savings
  2. Father-Mother Loans (Usually 0% interest rate)– Seriously, most parents never ask their kids for interests on any loans (secured or otherwise).  The only thing is that you need to justify your investments and learn to be prudent.  These are afterall your loved ones hard earned cash.  Did I mention interest free?
  3. Insurance Policy Loans (4% to 8% interest rate)– It is a capital raising tool that is frequently forgotten by most insured people.  Did you know that you can borrow up to 90% of the cash value of your insurance policies?  Hence, if you had a policy that is worth $10k in cash value (or otherwise known as surrender value), you can borrow up to $90k at 4% to 8% interest rate per annum.  The good part is that you are still insured by your policy as you take this loan from your cash value.  Superb!
  4. Credit Card Loans  (Nett 4.5% interest rate) – There are cheap loans on credit cards available that allows borrowers to repay the loan in 24 months.  These loans can amount to 2 times your monthly drawn salary and usually come disguised as “Interest Free Loans”.  Just remember to read the font size 1 terms and conditions to calculate the nett interest rates.
  5. Housing Loans (3% to 6% interest rate) – This is a rather complex, but interesting capital raising tool for people who owns property.  The key is to take a housing loan that is bigger than what you need.  The excess funds will then be available for us pegged at the housing loan rates, which are one of the most attractive interest rates in town.  While this sounds attractive compared to Lines of Credit loans or the complicated Car Loans, the complexity and paperwork is quite prohibitive for me.  Only recommended for home owners with huge properties or numerous properties.

The above is listed in the order of preference with the following criterias:

  1. Low interest rates – the lower the better
  2. Low consequences in the case of default
  3. Long repayment period
  4. Ease of approval

While the list I mentioned is not exhaustive, it should get most people started.

My friend then proceeded to look amazed and asked why would she get herself in debt to invest?  I then explained the reality.  There is good debt and bad bebt.

BAD DEBT

Most folks can easily find money to buy cars that depreciate 30% in value the moment you drive out of the showroom, or fund holiday trips to exotic destinations only to be miserable for months to pay off the hotel bills.  So anything debt that does not generate a positive return of cash to you can be considered bad debt.

GOOD DEBT

Taking a small loan/debt as a form of raising capital for good investments can be considered good debt.  This is because a wise investment can bring additional cash into your pockets and increase your individual net worth.  Hence a prudent investment can generate yearly returns from 10% to 20% from buying these investments!  This is a trick used by the rich.  Borrowing money to make even more money…

The assumption here is that she has the capacity (like a day job) to pay off the loan via installments over a 6 to 24 months period.  Thus she would be taking a loan to invest.  While she is paying off the loan, the investment would immediately start making money for her.  So in a scenario where she makes 12% returns on the investment and she had to pay an average of 6% on interest due to the loan, she would have a nett a respectable income of 6% on her investment.  This is in addition to the fact that she now owns a financial vehicle that will generate more returns in the years to come without having to lift another tiny finger.

Even in the event of the possible loss of value of the initial capital invested in a well chosen stock, the dividend should buffer the fluctuations, and also since you own the stock after 6 to 24 months, you do have long term holding power to wait for the value to rise to acceptable range again.

Stay tuned on what can potentially be a wise and prudent investment…

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In the movie Godzilla, the gigantic monster started off as a small harmless lizard on some island.  As it was left unchecked, it ate so much rubbish we dump on the island that it gradually grew into a humongous monster.  One day, while suffering from diarrhoea, rushed to the toilet and destroyed half the city along the way…

 

The moral of the story is that devastating effects come in small packages spread across a period of time.  I can think of several famous analogies such as “death by a thousand cuts” or “cooking a frog slowly“.  All describing a smiliar experience of suffering a slow agonising death without the victim realizing until it is too late.

 

So what do all these have to do with savings for investments?  The major problem with most of us is that we are oblivious about our normal spending patterns.  Small savings in our daily spending routines means more money saved for investments.  Take the following example:

 

Starbucks Latte versus Kopi

LatteA posh cafe latte costs about S$3.50 with tax.   Prepared by happy looking baristers (coffee makers), it makes you feel like the most important person in the world!  The courteous baristers smile and ask about your day.  They almost seem to actually care about your day.  This coffee boosts your ego as it tickles your taste buds.

 

KopiConsider the alternative – Kopi.  This coffee costs only S$0.70 without tax.  This raw unadulterated heartland coffee is brewed from the hot stuffy depths of any nearby coffeeshop.  The brewer is normally an old uncle who does not give a damn about you or your day.  There are only 2 versions available – with or without milk.  The coffee does nothing for your ego and often leaves you in perspiration.

 

Both types of coffee will satisfy the daily caffeine addiction of most folks. However, the Latte costs almost 700% more than a simple Kopi just to massage your ego at the expense of your wallet!  The cost of a Latte is able to fuel your caffeine needs for an entire week in the form of a Kopi.  On an annual scale, you will save approximately S$1,022 just by drinking Kopi instead of Latte.  Hence, a great way to savings is to start taking stock of your spending by cutting down on unnecessary costs. 

 

So should we ever pay for a more expensive Latte?  Does it mean that we should deprive ourselves from the luxurious coffee that life has to offer?  The best approach is enjoy luxury in moderation.  Spoil yourself occassionaly instead of making it a daily habit.  Always remember not to take cost cutting into the other extreme.  You would never get wealthy being stingy either!

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SnowballIt may surprise many, but even humongous things probably began as a small and insignificant item.  Imagine being smashed on the face by a snowball thrown by a snow monkey.  Not much damage given the size of the snowball.  However, do not attempt to annoy the same monkey when it is armed with the same snowball at the top of a snow covered mountain.   

 

AvalancheA small snowball, given sufficient time and momentum, is able to gather in force and size that it becomes a monstrous force of nature.  This frightening force of nature, also known as an avalanche, can be so immense that it is capable of destroying an entire town!  All the mayhem and destruction started life as an insignificant snowball!  So what does this have to do with investment, savings or even wealth? 

 

Most folks grumble and belittle the small amount of savings that they are able to put aside each month.  But little do they realise, that this “insignificant” savings can be accumulated into a significant sum money.  Coupled with compounded interests across a good period of time, with wise re-investments of dividends and interests, this gradually accumulates momentum into a rather significant wealth.

 

For example, at 12% compounded annual interest rates, doubles every 6 years of investment.  So with only just $10,000 savings, it becomes approximately $320,000 in just 30 years.  Did I mention only basic math and no physical labor required! 

 

No wonder the rich gets richer!  What are you waiting for?  Start your very own saving avalanche now!

ps.  No snow monkey was harmed during the writing of this article.

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GOLD Member!

GoldmemberOne of my favorite villain in the movie Austin Powers is Goldmember. The funny thing is that this character shows what most people are doing right now!  An overwhelming obsession with gold when the value of the US dollar is in the decline. Didn’t anyone learn from the movie that it was his obsession with gold that made him an evil villain in the first place?

So now to the key question: Should you invest in Gold right now?  The experts, financial analysts, bankers, and even the newspapers are saying that it’s the hottest thing since hot dogs!  Everyone (from your pet gold fish to your granny) should jump in and buy some! Before you do so, pause and think for a moment.

Here is a useful chart to begin our discussion:

30 year historic gold price

  1. In Jan 1974, gold price was approximately USD 100.
  2. Assuming inflation of 6% per year, 36 years later in 2010, gold price should be about 8 times the price in 1974. That works out to be about USD 800.
  3. The year is now 2008. So that means that by simple estimation, the price of gold should be close to USD 800 without any significant change in demand.
  4. Gold price in the market is currently at approximately USD 930.

So it is a risk to get into gold at the current price. So why are people paying higher prices now?  Is there a supply shortage?  Is it possible that Goldmember (the villain) is taking over all of the world’s gold for his evil love for gold showers, and thereby crippling Indian weddings (who needs gold dowry) and Chinese gold teeth markets?  Or perhaps folks are just driven by pure speculation and fear of the falling value of the US dollar.  Whatever the reason, the reality is that there will always be a limited supply of gold.  When there is more demand than supply, prices will rise.  So why is everyone placing more value in gold than money?

Perhaps we should now realise that money is just pieces of paper with some long dead guy’s face printed on it.  So whenever any government wants more money, it has the authority and ability to bring out its mega photocopier and print lots more!  Now where is the value backing paper money?  Some currencies have a micro-small footnote that says “blah blah blah government promises to pay bearer”.  While other currencies even go to the extent of omitting this statement altogether.  So the value of money is actually the value of the government’s promise to pay.  But to pay what is the question even I have no answers to.

Having said that, so gold should be best investments, right?  The problem is that there are no business fundamentals to back up the price of gold except global supply and demand.  So unless you are an expert world economist with the IQ of Einstein and incredible insights, I have no clue what is the true supply and demand!

So if you still insist on betting your wealth on gold at this price, limit your exposure to only 10% of your investment portfolio.  However, if you have several gold teeth, rush to your nearest pawn shop to ask for valuation of your gold fortunes!

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This is not about an epic saga about to unfold, but rather a piece of basic investment advise for a friend.

There are three ground rules to investments and mangaging your money.  These are for your own protection as well as your sanity.

  1. Invest only your excess cash or other people’s money.  So that means if you have more than 6 months of salary sitting idle in your bank, invest the excess!  Similarly, if you managed to insure a million dollars on your pet, and it recently got rolled over by a truck (which incidentally made you filthy rich), invest it!  Anything beyond your 6 months of your needs should not be left idling in your bank drawing zero point something of a percentage in the bank.  Also, excess cash means money more than you need for necessities
  2.  

  3. If you are turly serious about investment, learn to think long term.  That means think in terms of years instead of days.  Stop looking at the stock market ticker!  Any serious investor should realise that good companies should not fluctuate in values of millions in the course of a single day.  For example, these value fluctuations in the stock markets are implying that the world woke up one day and significant percentage of the customers decided not to drink Coke for some apparent reason…yikes!  The good news is that everything stablises across a period of time.
  4.  

  5. Never tell your parents what you are doing with the money.  They can ask, but you need not answer.  Most well intentioned comments from parents are usually negative.  Dun ask me why.  If they had understood how to invest and taught you how to, you would not be reading this article.  You would have inherited a fortune and enjoying coconut juice on some tropical island that you own.
  6.  

So the list is not exhaustive, but it is a start for most folks.

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