Wednesday, August 25, 2010
Friday, August 20, 2010
The idea of Wheel of Life has a profound impact on me after my 5 weeks training. This is the first training course which I have attended that emphasizes on the need to work on every aspect in life, instead of just money or relationships alone.
I did Finance in both my undergraduate and postgraduate studies. Just like most of the young finance graduates, I have always wanted to be an investment banker. I was so fascinated by the sophistication of the job, the glamorous lifestyles and, of course, the handsome monetary compensation too.
To me back then, the definition of Success was the number of zeros you have in your bank account, the title of your job and the bank you are working at.
Lucky enough, I had the chance to work in a Swiss investment bank in Hong Kong a couple years later. I was literally working 7 days a week, an average of 90 hours a week. It was a very rewarding experience nonetheless and till today, I am still benefiting from the hours of hard work which I have put in. However, despite the increasing level of wealth, I realized that I do not feel happy at all.
Despite having a great career and being financially healthy, I realized that I do not have the balance in life – I did not exercise as much as I should be; nor did I spend enough time with my wife or my friends; worst of all, being miles apart from my parents, I did not spend enough time with them too.
Due to the fact that we are so busy with work, we often take the most important things in life for granted.
I was very grateful that I was presented with a wonderful opportunity to return to Malaysia, doing a job which gives me great sense of accomplishment. Furthermore, it enables me to live a more balance life now. I must admit that it was not an easy decision to be made, but with a clear vision of what I want in mind, I made the choice.
All these while, I always have the concept of “balance in life” but it was not very clear to me. I was very lazy when it comes to “sit down and write down your goals” because I thought, I know what I want in life, and they can be easily pulled out from my mind whenever I want to.
However, after attending the course, I was told to list down my 7-day goals, my master dream list, goal planning sheets and others, I suddenly realize, and appreciate the power of writing them down.
What I want in life and how I would like to achieve them are much clearer to me now.
“Personal leadership is the self-confident ability to crystallize your thinking and establish an exact direction for your own life, to commit yourself to moving in that direction, and then to take determined action to acquire, accomplish, or become whatever you identify as the ultimate goal for your life”
Writing what I want to achieve in life down on a paper enables me to crystallize my thinking, and guides me to the right direction. I believe, as long as I persevere, and determined enough, I will be Successful in life too.
Today, I can proudly say that, finally, I understand the true meaning of Success – It is the progressive realization of worthwhile predetermined personal goals, and they are my goals to make me a more complete and balanced human being.
Thursday, August 12, 2010
Friday, August 06, 2010
Rule #1 of investing, you must know your own benchmark.
i.e. when you get your return on investment (ROI), you must be able to see, whether has it been a profitable investment, or otherwise.
For instance, in Malaysia,
- The inflation rate is about 3% a year, whereas
- 12-months fixed deposits (FD) give you about 3.70% per annum.
-Unit trust A, with 100% equities exposure gives you 8% return a year.
- Direct investment in stock B listed on KLCI 15% p.a. (tell me if you can find one!)
- 1 banana is selling for RM1. (c’mon, tell me you do have some sense of humour!)
Ok, so what does all these numbers and facts mean?
Let’s start with a simple scenario. You’re 25 years old. Work your arse off for 2 years and manage to save up RM 5,000. What an achievement.
But you know for sure RM5k savings won’t bring you anywhere. So you have decided to take a bold move and ready for some investment.
Naturally, and traditionally, most of our “investments” are in Banks’ FD. Correct?
If, and only if, you keep your savings underneath your pillow, so what have you actually “lose”?
Beginning of the year you have RM5k, in terms of purchasing power, you can afford to buy 5,000 bananas. Wow. Ok, then you decide to put 5k underneath your pillow.
After 1 year, you dig out your RM5k notes, go to Giant or Tesco and want to reward yourself with 5k bananas, only to find out that due to inflation, 1 banana now costs you RM 1.03.
So in terms of purchasing power, your RM 5k no longer can buy you 5k bananas, but only RM 5k / RM 1.03 = 4,854 bananas, 146 bananas less than one year before!
So in the end, you still have your money in hand, but, it has lost its value. Thanks to the erosion caused by Inflation!
Same scenario as before, but you use the RM5k at the beginning of the year to buy RM5k worth of bananas, i.e. you have 5,000 bananas in store. Assume that you can store it in superb condition for a year (ignoring storage costs……); at the end of the year, you sell all the bananas at market price of RM 1.03. At the end of the year, you have RM 5,000 * RM 1.03 = RM 5,150.
Oh wait, have I made 150 bucks for trading bananas? Not bad eh! But wait a minute, something is not right here.
Actual return on investment = RM 150 / RM 5000 = 3% = inflation rate p.a.!
So you thought you made some, but in the end, you only manage to hedge your savings!
So instead of buying bananas, you put your money into FD. Smart move.
After one year, you have RM 5,000 plus 3.70% interests = RM 5,185. Not bad.
You withdraw all the money from the bank and go get yourself some banana.
At the end of year banana price of RM 1.03, you can buy RM 5,185 / RM 1.03 = 5,034 bananas! Crikey! 180 more than case 1, 34 more than case 2!
You want more bananas?
CASE 4 & 5:
Just lump the two investments together, basically they will tell the same story.
Instead of putting in the FD, you have decided to buy Unit Trust A or direct investment into stock B.
Maybe it’s pure luck or maybe you’re inspired by financial geeks, you get 8% return back from investment A and / or 15% back from investment B. Bravo!
So how much have I made? You asked yourself. Let’s get back to the real finance and stop playing so much with bananas.
You should know by now that inflation will eat into the amount of bananas that you can buy at the end of year. Good.
So now you have made 8% (15% for B). But which benchmark do you compare against?
Both the investments have beaten inflation rate of 3% like how Bruce Lee smashesfinancial_cicak. If you lose me here, it means that you can buy yourself a lot more bananas.
But is that your real benchmark? You should be smart enough to put your savings in FD.
Instead of putting your money with the bank which gives you 3.70%, now you’re investing in unit trusts or share.
So by not investing in FD has become an opportunity cost for you! Is it really worth it?
Absolutely. Investment A gives you an extra 5% return while investing in stock market gives you a handsome 12% return!
Thus your actual benchmark is … your next best investment opportunity! In this case, FD.
But hey, are we missing out something here? I am afraid so.
Rule #2 of investing – Risks vs Return
The above example has one major flaw. It has totally ignored one of the most important elements in terms of investing. RISK!
Basically the illustration here assume that all the investments, either in bananas, hide underneath pillow, FD, A or B have similar risks. Is this the case?
No no… so how do we measure risks? That's another story altogether that deserves a whole chapter to itself...