Should u jump into commodities?

Gold is rising yet again! Should you jump into commodities? aah.. these are questions that u should answer... bearing in mind the kind of risks you will need to bear..if u jumped.

The skyrocketing prices of commodities such as crude oil and gold have made this asset class a hot topic among investors. With commodity prices at historical highs, investors are wondering if the cycle has peaked. Some call it a commodities bubble that will burst soon.

Morgan Stanley economist Stephen Roach believes prices will tumble amid a United States recession and property market collapse. Others warn that commodities trading is the riskiest way to invest your savings because of the wild gyrations in prices.

But 'bulls' such as veteran US investor Jim Rogers beg to differ.'We are in a bull market for commodities that is likely to last beyond 2020,' he said. 'This is because supply and demand got terribly out of whack years ago.

It will certainly take many years to build new capacity by opening new mines or discovering new oil fields.'In the meantime, prices will be pushed up as the available supply cannot satisfy the voracious appetites of emerging economies.

For the average retail investor, taking the middle-of-the-road approach is to assume that the fastest growth has already come and gone. So you should be more selective and pick commodities that are likely to enjoy a sustained plateau in prices, rather than those whose prices might spike temporarily and then flop over time.. So how can an investor get his toes wet without drowning?

Commodity indexes

THESE act like stock indexes, tracking a group of commodities for benchmarking and investing purposes. They are constructed and managed by various financial institutions. Since mid-1998, the Goldman Sachs Commodity Index has seen returns of 265 per cent and the Dow Jones-AIG Commodity Index 234 per cent.

Exchange-traded funds

FOR investors, exchange-traded funds (ETFs) offer exposure to gold, silver, oil, individual commodity sectors and broad-based commodity futures indexes. Take the Singapore Exchange's Lyxor ETF Commodities CRB, which is based on the Reuters/Jefferies CRB Index. It is made up of a basket of 19 commodities that range from energy, industrial metals and agriculture to livestock. Since it was listed in January, its net asset value has risen from US$2.71 to over US$4.04.

EMERGING market funds, which are Mutual funds, in particular, allow you to participate in the commodities boom by tapping the growth of countries blessed with raw materials. These include South Africa, which has the world's largest gold reserves; Saudi Arabia, which boasts the largest oil reserves; and Cuba, a huge sugarcane producer.Among the many options available are Schroder Investment Management's agriculture fund and alternative solutions commodity fund, the UOB United Global Emerging Markets Portfolio and Pimco's emerging markets bond fund.

Commodity-linked stocks

YOU can buy shares of Singapore-listed commodity traders and producers such as Indofood Agri, Golden Agri, Straits Asia Resources, First Resources and Wilmar. There are also commodity-related stocks such as those of oil-rig builder Keppel Corp. Investors take on both corporate and equity market risks when they buy into these stocks. They typically have a higher correlation to equity markets than commodity markets.Reasons for investing in Commodities: They are considered a good hedge against rising inflation.The past few years of torrid growth in emerging economies such as China and India have created massive demand for a plethora of raw materials. That demand, in turn, has pushed up the prices of these commodities, faster than inflation. Commodities are also viewed as a powerful tool for diversifying one's portfolio.

Historically, they have a negative correlation with both stocks and bonds. In other words, when these fall in price, commodities tend to head north. In the past few months, while global stock markets plunged, prices of commodities such as gold, crude oil, wheat and palm oil have hit all-time highs. For those of you who are wary of sinking money into the stock market now, but do not want your cash to sit in a bank and shrink in value as inflation climbs above 5 per cent, commodities might be a good way to keep your savings intact. Financial advisers say a typical diversified portfolio might include 5 per cent commodities, 60 per cent stocks, 25 per cent bonds and 10 per cent Treasury bills.

FOR THE RISK-TAKING INVESTOR....

Buying directly into the future of energy, metals ..IF YOU are a relatively sophisticated investor aged 21 or over, you can open a derivatives trading account at most major brokerages such as Phillip Securities or DBS Vickers Securities. This will allow you to trade futures contracts on exchanges worldwide - from Bursa Malaysia's ringgit-denominated crude palm oil futures contract (FCPO) to metals contracts on the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (Nymex). A futures contract represents a financial obligation to buy a certain quantity of a physical commodity at a preset date and price. Most brokerages will let you deposit your funds in Singapore dollars or any other major currency. You can trade on futures exchanges and over-the- counter foreign exchanges on a margin basis, which means you can leverage so as to trade contracts with a larger nominal value. The margin is set to cover the price risk of the portfolio for a specified period.

There are three categories: energy and metal futures, which generally mean 'hard' commodities, and agriculture futures, for 'soft' commodities. Energy OIL could soar to higher levels. But investors need to be well-versed in the price dynamics of the many varieties of oil contracts from light sweet crude to brent, which are traded on Nymex and the Intercontinental Exchange (ICE).

Metals

THE star performer last year was copper. Shortages due to inefficient excavation of old mines pushed up the price to over 360 per cent of the 2003 level. Some investors buy the stocks of big miners such as Freeport McMoRan and Southern Copper, but to do this, you need to open overseas trading accounts via your local broker. Copper plays into the popular investment theme of 'What China Is Buying'.

China's rapid infrastructure development has made it the world's largest consumer of many metals, but you zoom in on the ones it needs to import. Zinc is abundant in China, while copper is found mainly in South America and tin in Indonesia.For aluminium, China used to rely on its own production, but it is likely to become a net importer this year. Said Standard Chartered commodity analyst Judy Zhu: 'The government clamped down on production a few years ago, so this may support global prices.'Many investors are going for gold because the weakening greenback has pushed prices above US$1,000 an ounce currently. But they might still have further to go.

Also, gold is more easily accessible investment-wise than some other metals. You can buy or sell physical gold such as gold bars, or gold certificates from banks such as the Canadian Bank of Nova Scotia and United Overseas Bank (UOB), but this attracts GST of 7 per cent. Singapore investors can use monies in their Central Provident Fund Investment Scheme-Ordinary Account(CPFIS-OA), but the sum cannot exceed the available Gold Limit, which is 10 per cent of the total CPFIS-OA funds. One thing to note is the high investment outlay for gold.

A one-kilobar certificate can cost over $36,000.For sophisticated investors who want exposure to a variety of hard and soft commodities, ABN Amro is preparing to launch a call warrant that tracks the RICI Enhanced Global Index, an index designed by the bank and veteran investor Jim Rogers.It will be based on the RICI, a commodity index developed by Mr Rogers in 1998 that covers 37 commodities and has generated returns of more than 500 per cent since July 1998.

Called zero strike participation certificates, or zero certs, the warrants have an exercise price of zero. If the index goes up by $1, the issue also gains $1, which makes it easier to track the performance of the index and calculate capital gains. Each zero cert has an initial price of about $1; the minimum investment is about $1,000.

Soft commodities

THIS is a growing investment theme because consumers in China and India are wolfing down more food as standards of living rise. For instance, estimates put the wheat consumption of these two countries at as much as 39 per cent of the world's total supply.In addition, with the 'green' movement, legislation in some places such as California has pushed farmers to grow corn not for food but to make ethanol-based energy products.But beware the extreme volatility in the prices of soft commodities, including coffee, palm oil and rice, which spoil easily.

Palm oil producers, for instance, who have a huge harvest might have to dump it on the market within a few weeks before it rots.A savvy farmer might hedge his crop by selling futures contracts to lock in the price at which he will sell the palm oil. This hedging activity, combined with natural harvest cycles and unpredictable weather, can generate extreme swings in prices. Corn prices could test new highs if demand for ethanol-based energy sources continues to soar.

Unconventional plays

SOME off-the-beaten-track investments with upside potential include uranium and palladium.Some experts say uranium prices are likely to go 'nuclear' in a few years as traditional sources of energy such as oil and coal run out and 'cleaner' sources such as uranium trump more expensive ones such as ethanol-based energy.

There are indications that global demand for uranium might surge in a few years. As of the middle of last year, there were 30 nuclear plants under construction globally, while another 70 had been planned and 150 more proposed. Meanwhile, supply from uranium mines and decommissioned nuclear weapons is limited.Palladium recently made a popular debut as the new 'platinum' in jewellery, especially in the China market because it is cheaper for jewellery buyers to use while providing immense profit margins for manufacturers.Consumption by the jewellery industry has more than tripled over the past two years, rising to 1.13 million ounces a year.

Starting first With Budgeting

A budget is the most fundamental and most effective financial management tool available to anyone.

Yes, anyone—whether you are earning thousands of dollars a year, or hundreds of thousands of dollars a year. It is extremely important to know how much money you have to spend, and where you are spending it.

Budgeting and Investing are Different Topics

Yes, some of your "spending" might be for investments, but there is an important distinction between creating a personal budget and deciding where to invest your extra income.

A budget is the first and most important step towards maximizing the power of your money.What is in it for you?Just about everything. A carpenter would never start work on a new house without a blueprint. You would not get in a car for a cross-country road trip without a map (we hope not). An aerospace firm would not build a rocket booster without a detailed set of design specifications. Yet many of us find ourselves in the circumstance of getting out on our own and making, spending, and investing money without a plan to guide us. Budgeting is about planning. And planning is crucial to produce a desired result.

For at least three months, try a free online programme (out of three sites) to download and track your spending..

a) Mint

b) Quicken

c) Wesabe

10 Good Habits

10 Good Habits

Putting aside away more cash or keeping close track of expenses and rebalancing your risks are even more important in a downturn. Across the globe, unemployment rose and house prices plummeted. Thankfully petrol prices dipped. But Most major economies are slowing down.

But just because the outlook is bleak, this is no time to bury your head in the sand and hope the sun is shining again when you pull it out. The start of any new year, let alone a year such as this, is an opportune time to dust down some of our old, longstanding financial habits, priorities and assumptions and make new resolutions.

Here are 10 good money habits to help you do just that.

1 Take stock of your cash position

The standard financial advice during ordinary times is to have sufficient cash set aside to cover at least six months of your monthly household expenses.

With the current economic downturn, having six months may not be enough, says Ms Anne Tay, OCBC Bank's vice-president of group wealth management. This is because we should cater for contingencies such as pay cuts, involuntary leave or an unexpected job loss.

Fundsupermart research manager Mah Ching Cheng suggests that a good rule of thumb is to save up to 12 months of your monthly expenditure, depending on how risk averse you are.
This means that if your monthly expenditure is $2,000, a buffer of up to $24,000 would be a good amount to keep in a deposit account.

2 Set a realistic budget

This is considered by Mr Patrick Lim, associate director of financial advisory firm PromiseLand, to be the most basic good money habit and tool to control your finances. A realistic budget that is drawn up and adhered to will go a long way towards helping one live within one's means.

'By keeping track of where every dollar is spent, the budget shows where the money goes to and how much is left over,' he said.

In fact, why not go a step further, raise the bar and pose a personal challenge to yourself to become debt-free within a reasonable timeframe, says Alpha Financial Advisers manager Cai Zong Zhen.

Another tip is to review your budget every 12 months, or when your circumstances change, such as when you receive a windfall or inheritance, or when you have a new addition to your family.

3 Paying yourself first

A related habit to budgeting is to adopt a disciplined approach to saving. Every month, allocate a portion your income to savings, insurance and investments to create wealth, before paying for your other expenses. Increase this portion when your income goes up, such as when you have pay increments or annual bonuses.

To up one's savings, Ms Tay recommends reducing 'wastage' in one's daily spending. For example, avoid impulse buying, dine out less and consolidate shopping trips.

'Buy in one go rather than make frequent shopping trips because you tend to spend less with fewer trips, and look for cheaper alternatives or substitute goods and services if you need to spend,' she added.

4 Start a regular savings plan

When building your liquidity, look out for regular savings plans that pay higher interest rates. Examples are the OCBC Monthly Savings Account and DBS Bank's MySavings Account.

The former allows customers to set aside monthly amounts from a minimum of $50 to a maximum of $5,000. For savings below $800, the interest rate is 1.08 per cent a year. For savings from $800 to $5,000, the interest is higher - 1.48 per cent a year. The tenure is fixed at 24 months and the rate remains unchanged during the two-year period.

Customers cannot change the monthly contribution amount once it is committed, but they can save more on an ad hoc basis. For the additional amount that they save on top of their monthly commitment, they get interest of 0.8 per cent a year instead. The full amount, including the additional savings, can be withdrawn only at the end of the 24-month period.

DBS' MySavings account offers greater flexibility in terms of the monthly savings amounts and the tenure. Customers can choose to save a minimum of $50 to a maximum of $3,000 monthly and there is no fixed tenure, so a customer can opt to save for as long as he wants.

The interest is paid monthly. For amounts between $50 and $290, the interest is 0.45 per cent a year; for $300 to $790, it is 1 per cent; for $800 to $1,490, it is 1.2 per cent; and for $1,500 to $3,000, it is 1.5 per cent.

DBS Treasures customers, or those with at least $200,000 with the bank, enjoy higher rates of 1.3 per cent, 1.4 per cent, 1.5 per cent and 1.6 per cent respectively. But do note that there's a penalty for withdrawal.

The monthly interest on the total balance will earn the first-tier interest rate when there is a withdrawal, a failed deduction of the monthly savings amount or if the account is closed during the month.

5 Managing your debt

This has become more important with the financial turmoil, says Ms Tay.

Her advice is to avoid using credit as people tend to spend less when using cash, since cash transactions have the psychological effect of helping to curb unnecessary expenditure, compared to 'plastic' or other non-cash transactions.

In fact, use this opportunity to calculate your debt servicing ratio. This is basically a guide to how much of your take-home pay - that is gross pay less 20 per cent employee CPF contribution and personal income taxes - is used to pay debts.

Debt payments are monthly expenses that you are committed to, such as your mortgage, car loans, personal loans or even credit card debts. A healthy debt servicing ratio - derived from debt divided by income - should be 35 per cent or less.

To put it another way, out of every $1,000 of after-tax and CPF income, you should spend $350 or less in debt repayments. If you have to spend via credit cards, adopt the habit of paying your bills in full each month. Avoid rolling over your balance and accumulating debts at a high interest rate of 24 per cent a year. For instance, if you have a credit card bill of $10,000, the interest payable at that rate for six months will be $1,200, plus any late finance charges you may also incur.

6 Adopt a long-term view for investments

A recent study by British insurer Aviva on savings attitudes indicated that Singaporeans have a short-term outlook of five years or less when it comes to financial planning.

The insurer advised Singaporeans not to neglect their long-term savings and investment needs when faced with the current short-term economic challenges.

Another reason to take the long view regarding investments is that the current crisis may drag on longer than expected.

Also, be aware of the possibility that you may not be able to unwind quickly to avoid suffering a loss, cautions Ms Tay.

But exactly how many years constitutes a long-term view?

Using historical data, Fundsupermart worked out the probability of getting positive returns against the number of years that investors stay invested.

The findings suggest that the longer the holding period, the higher the probability of positive returns and the greater the expected return.

Says Ms Mah: 'After studying historical probabilities using the MSCI World Index, we found that the probability of positive returns increased to 100 per cent for both the 15-year and 20-year holding periods, while there was a 96.7 per cent probability of a positive return for a 10-year holding period.'

This presents a strong case for having a longer holding period of 10 to 20 years when investing in the equity market.

7 Understand your risk appetite

This means finding the optimal asset allocation that fits your risk profile. Asset allocation is an important factor to consider when restructuring your portfolio.

Fundsupermart recommends investors who are more conservative to hold a portfolio with 80 per cent in bonds and 20 per cent in equities. On the other hand, an investor with a more balanced risk outlook should consider holding 40 per cent in bonds and 60 per cent in equities.

Last year, bond funds outperformed equity funds. Therefore, the bond proportion of your portfolio is likely to have increased, given the crash in equity markets. As a result, rebalancing the bond and equity proportions in your portfolio to the initial weighting is necessary.

For the equity portion of the portfolio, Ms Mah recommends a core and supplementary portfolio to better control risks. The larger core portion of the portfolio consists of the more broadly diversified regional equity funds (such as the United States, Japan, Europe, Asia ex-Japan and emerging markets), and the smaller supplementary portfolio consists of narrowly focused equity funds such as single-country or sector-based funds (such as Singapore, India, China and Malaysia).

While the market was booming in 2007, you may have added a few of the higher-risk emerging market equity funds. However, now is the time to see if it is absolutely necessary to have so many of these funds in your portfolio.

If you have five funds in your supplementary portfolio made up of individual Bric, that is Brazil, Russia, India and China equity funds, you should consider either redeeming the Bric fund or some of the single-country funds. The rationale behind this is to try to consolidate your holdings.

As you boost the number of funds in your portfolio, you are likely to see overlaps between
regions or sectors. You might even find that you are overly exposed to a certain region or sector.

8 Go for low-cost and resilient funds

Fundsupermart uses three basic selection criteria for its recommended funds list. Firstly, it recommends only funds with a track record of at least three years. Secondly, it favours funds with lower expense ratios - what investors pay to the fund manager on an annual basis.

For bond funds, low expense ratios could range from 0.25 to 0.75 per cent, depending on the nature of the fund. For example, emerging market funds and high yield bond funds typically have higher expense ratios.

For equity funds, which are actively managed, a rule of thumb would be an expense ratio of 2 per cent and below. Finally, Fundsupermart measures the fund's resiliency during a market slump. Some funds are more resilient than others during times of volatility.

To identify resilient funds, it scores them by looking at their performances during different time periods. For example, if they held up well in comparison to their competitors during periods such as the Asian financial crisis, the technology bubble or the current global financial crisis, they will be scored higher.

According to Ms Mah, two funds - First State Dividend Advantage and Aberdeen Pacific Equity - are relatively resilient in contrast to their peers and the expense ratio is below 2 per cent in the last reported annual reports.

9 Contribute to the Supplementary Retirement Scheme

The main purpose of the SRS account is to provide disciplined savings to accumulate funds for your golden years. It also helps cut your personal income tax, as you can claim tax relief on your SRS contributions, up to the maximum annual sum of $11,475.

The contributions may be used to buy various approved investment instruments and the returns are accumulated tax-free. You can open an SRS account at branches of DBS, OCBC Bank and United Overseas Bank.

However, do note that withdrawals from your SRS account before the retirement age of 62 is subject to tax and incur a penalty of 5 per cent. After the retirement age, withdrawals from SRS are still subject to personal income tax, but one can choose to spread the withdrawals over 10 years, and only 50 per cent of the withdrawals will be taxable.

This means that a retiree who has no other income at the age of 62 will be paying zero or very low tax when he withdraws his SRS funds as he will fall under a low tax bracket. This reduces tax payable since it is a deferred tax scheme. At 50 per cent tax savings, SRS funds that are withdrawn over 10 years will incur zero tax if the chargeable amount for tax computation is less than $20,000.

It is too late to contribute to SRS to enjoy the tax relief on last year's income but you have the whole year ahead of you to do so for this year's income.

10 Pick robust stocks

In current market conditions, it is essential to understand one's investment time-frame and objectives.

Equally important is the selection of stocks that will meet one's investment goals, says Ms Carmen Lee, head of OCBC Investment Research.

As market conditions are still fairly volatile, risks will continue to prevail. For investors with a lower risk appetite, it is advisable to invest in blue-chip companies with established business track records and sustainable business models. This is vital in recessionary market conditions, as it means that the organisation will have the right business models to ride out difficult times.

Examples of blue chips are SingTel, M1, StarHub, SembCorp Marine, Singapore Press Holdings (SPH) and Straits Asia Resources. Other stock picks by Ms Lee include Ezra, Midas, Tat Hong, Pacific Andes and Sino-Environment.

Companies that have been through a few business cycles are also better equipped to understand and deal with the challenges in a downturn. A good case to bear in mind is the Internet bubble in 2000-2001. Several high-profile Internet companies that mushroomed during that period are no longer in existence.

Another factor to watch out for is the management of firms, since they are the drivers and executors of the business, says DMG & Partners head of research Terence Wong.

It is important for the company to have a strong balance sheet and cash flows. Valuations tell you whether the stock is worth investing in. The company may have the best fundamentals in the market, but if it is overpriced, it is not worth investing in. Look at ratios like price-to-earnings or price-to-book and compare these guides to share values with industry averages.

Looking ahead, Mr Wong believes markets are likely to get worse before recovering, as the reality of job losses, pay cuts and less-than-stellar economic figures hit home.

'In the near term, it is best to invest in some defensive plays such as SPH, StarHub and ST Engineering, while investors with a longer-term horizon can look at economic bellwethers, as they will be the first to pick up,' he says.

'Don't be surprised if the stock market decouples from the real economy in 2009 and shoots up towards the later part of the year. The Straits Times Index made powerful runs in 1998 and 2003, two of the worst years for the Singapore economy over the past decade.'
Source: The Straits Times

Why Fear is a loser?

Investors are constantly reminded that staying invested is the key to successful investment. But when the values of their portfolios plummet due to poor-performing equity markets, fear invariably takes over and it becomes increasingly difficult to adhere to that advice. In fact, most investors go into a selling frenzy when markets decline.

Investors who are experiencing that sinking feeling can take heart from the latest findings from US-based research firm Dalbar. The latter has been measuring the effects of investor decisions to buy, sell and switch into and out of funds since 1984. In its 2008 report, it examines real investor returns for funds of various asset classes for the 20 years ended Dec 31 last year.

Don't time the market

'Judging from the level of pessimism, the level of cash holdings, the upswing could come fast and steep too. You don't want to take the risk that you could be out of the market when it recovers.'Ms Penny Lim, director at financial advisory firm FPA Financial, advising clients not to sell out in panic and wait to get back in later

Think long-term and ignore the noise

Retail investor and businessman Felix Lee, 48, believes in staying invested for the long haul, even during times of poor market sentiment. He admits to feeling anxious about the present volatile state of equity markets, but is not afraid.'If you have diversified your investments nicely, there is a sense of anxiety towards your mid-term investments, but the emotion is not one of fear,' said Mr Lee.

Staying invested does pay off

One key finding is that unit trust investors who hold their investments typically earn higher returns over time than those who time the market. Dalbar explains that retention is 'critical' to investment success because one cannot benefit from the market if one is not in the market. This is because though it is beneficial to avoid market downturns, very few investors actually do so consistently and successfully.

The key, says the report, is to remain invested to reap the benefits of any market gains.

'During the last 20 years, equity investors would have realised monthly gains 65 per cent of the time. In other words, their chances of making money would have been nearly seven in 10,' says the report.

Guessing it wrong

Using its Guess Right Ratio, Dalbar highlights the problem that investors face. It appears that most investors are able to make the right decision in a rising market but they are unable to guess the direction of the market correctly after a bear market.

These investors typically guess wrongly that the market would not recover - an assumption based on fear. As a result, they stayed on the sidelines as the market recovered. But the 'really smart decision', says Dalbar, is to invest when the market is down.

Its Guess Right Ratio measures how often the average equity investor correctly 'guesses' the direction of the market. Net mutual fund inflows and outflows are used to determine if investors made short-term gains by correctly anticipating the direction of the market. The average investor guesses right when there is either net inflow each month followed by a market rise or net outflow followed by a downturn.

An analysis of the 20-year period ended last Dec 31 shows that equity investors were more often right than wrong. However, the periods of incorrect guessing had an impact on their portfolios. Perhaps not surprisingly, the Guess Right Ratio was highest - at least 67 per cent or eight out of 12 months - during years when markets posted strong returns and, with few exceptions, lowest during market declines. The overall Guess Right Ratio for the 20-year period is 61 per cent.

This is why Ms Penny Lim, director at financial advisory firm FPA Financial, does not recommend that clients try to time the market by selling out and waiting to get back in later at a lower price.

'It will be risky to do so now, as you could end up being out of the market when it rebounds. Judging from the level of pessimism, the level of cash holdings, the upswing could come fast and steep too. You don't want to take the risk that you could be out of the market when it recovers,' she said.

Buy and holding period

A contributing factor to the poor investor performance is the 'less-than-ideal' holding period, says the Dalbar report.

Its research shows that equity shareholders usually sell their holdings in less than four years. This implies that investors do not have the patience or emotional discipline to weather market dips. In fact, the current trend indicates that the average holding period for funds has deteriorated, no thanks to the US sub-prime mortgage crisis and subsequent economic downturn.

It is no wonder Dalbar finds that over the 20 years ended last December, the average equity fund investor would have earned just 4.48 per cent a year, compared with the S&P 500's annualised return of 11.8 per cent. This translates into an underperformance of more than 7 per cent a year.

Proper asset allocation

A tip on containing investor fear and avoiding market timing is to focus on risk control.
'Have an asset allocation that gives you a comfortable downside. If you can stomach 10 per cent annual loss, then find an allocation that gives you that,' said Mr Chris Firth, chief executive of wealth management firm dollarDex.

This is because you are less likely to panic when the inevitable bad period comes along.
Building a suitable asset allocation requires an understanding of your risk tolerance, time horizon and your required rate of return, said Mr Ben Fok, chief executive of Grandtag Financial Consultancy.

Still, it doesn't mean that investors can take a backseat and relax once a portfolio is set up. It should be reviewed at least quarterly.

Balancing your portfolio

Another piece of advice given by investment experts is to buy low, sell high, something which most investors would agree is easier said than done.

But if you are constantly rebalancing your portfolio, you are in effect already buying low and selling high, said Mr Fok.

Rebalancing is an effective means of bringing your portfolio back to your original asset allocation mix of stocks, bonds and cash. It is necessary because over time some of your investments might become 'out of alignment' with your investment goals.

For example, your initial asset allocation might have been 60 per cent equity, 30 per cent bonds and 10 per cent cash. Due to the bullish stock market, your asset allocation changed to 80 per cent equity, 15 per cent bonds and 5 per cent cash. Accordingly, you should rebalance the portfolio to get back to the initial asset allocation.

You do this by selling 20 per cent equity and buying an additional 15 per cent bonds and 5 per cent cash. Rebalancing requires you to sell assets that are performing well and buy assets that are currently out of favour.

By doing so, you'll ensure that your portfolio does not overemphasise one or more asset categories, and you would return your portfolio to a comfortable level of risk, added Mr Fok.

Even out risks to grow your nest egg faster!

June 22, 2008

Even out risks to grow nest egg faster
By Lorna tan, Finance Correspondent

Last month, I shared about how I like to 'pay myself first' by having money channelled automatically from my payroll and deposited straight into regular savings plans.

A closely related concept is 'dollar-cost averaging', which could be a part of such plans, if one intends to enter the investment market at regular intervals.

In fact, many financial experts prefer dollar-cost averaging to lump-sum investments - particularly when protecting against paying too much for investments in a volatile market.

This is how dollar-cost averaging works. The same dollar amount is invested at regular intervals, say monthly, into a diversified investment portfolio. This arrangement holds regardless how the market is doing. As a result, the price paid for the shares or unit trusts is averaged out.

This means more shares are bought when prices are low and less when prices are high. The natural question that comes to mind is how spreading one's investment over time, via dollar-cost averaging, gives you better results than investing a lump sum in the market.

Let's examine which method is better.

Method 1: Lump-sum investing

Doing this effectively means timing the market by trying to buy low and sell high. It's great if one succeeds but in reality, most people fall on their face. Such investors lose money primarily because their greed and fear result in an inaccurate reading of the market.

Studies from US-based research firm Dalbar have shown that those who attempt to anticipate market movements usually run the risk of exiting and entering the market at the wrong times.

For example, let's assume you have $10,000 and you want to purchase stock A, whose price recently fell to $10 apiece. Having seen it hit a high of $15 a share previously, you think this is a good time to buy, and go on to purchase 1,000 shares.

A month later, the shares dip to $5 apiece, but you decide to hang on to them. Ten months later, stock A remains at $5. You now have a paper loss of $5,000.

Method 2: Dollar-cost averaging

This method entails dividing the principal sum of $10,000 into equal amounts of $1,000 and investing the smaller sums every month for 10 months, regardless of how the market is doing.

Let's say that the price of stock A remains at $10 for the first five months and falls to $5 a share in the next five months. Using dollar-cost averaging, you would buy 100 shares with $1,000 in each of the first five months and 200 shares with $1,000 in each of the next five months.

As a result, you are able to buy more shares when the price is low and this means owning more shares overall. At the end of 10 months, instead of having 1,000 shares, as would have been the case if you had invested a lump sum, you now have 1,500 shares.

And even though the share price is down to $5 apiece, your holdings are worth $7,500, instead of the $5,000 they would have been worth if you had done a single outright transaction. This translates into a smaller loss of $2,500, compared with the $5,000 you would have lost if you had done a lump-sum investment.

With dollar-cost averaging, you are able to limit your loss when the market is trending down. his method also eliminates the risk of market timing and creates the discipline to stay invested in the market at all times. These reasons explain why investors are better off using dollar-cost averaging in the long run.

New method: Value averaging plans

Recently, wealth management firm dollarDex introduced value averaging plans (VAPs) which take dollar- cost averaging a step further.

This is how they work. With VAPs, the aim is to automatically take advantage of market volatility by investing more when markets are lower, and less when markets are higher. In volatile conditions, this can mean higher portfolio returns.

At the heart of these plans is a mathematical formula which guides the investment of money over time into a portfolio. While dollar-cost averaging relies on a fixed investment amount in each period, value averaging dynamically adjusts these amounts in response to market changes.

Value averaging works on the principle that you would want to increase your portfolio by a certain value over time, for example, $1,000 each month.

Some of this value could be in the form of an incremental investment each month, perhaps coming from your bank account via GIRO. Some of it could come from gains made through the existing portfolio during bullish markets.

For example, in a good month, your current portfolio might rise in value by $600. A VAP would recognise that you need to add only $400 to your portfolio from your bank in that month to keep on track for the $1,000 of value to be added.

Conversely, when markets are down and your portfolio is down by, say, $250 that month, the VAP will recognise that you need to add $1,250 of fresh money to your portfolio to stay on track.
The net result is that when markets are trending up, your bank account is called on less. When markets decline, your fresh investments increase. It's simply a twist on the idea of buying more when prices are low.

Most regular savings plans allow you to invest with as little as $1,000 initially and $100 thereafter. A good option is to do both lump- sum investing and dollar-cost averaging by starting with a small lump sum and topping up regularly.

Investing is not so much about timing the market but about time in the market. So invest regularly, with a long-term view and stay disciplined.

What is an annuity?

June 22, 2008

What is an annuity? Where do you see this? -In insurance policies and investment websites.

What does it mean? It is an insurance plan that is usually bought for retirement. It provides a guaranteed regular income to the policyholder for life, or for a specified period.

An annuity is typically bought with a single lump-sum investment.

Annuities come in different forms. For instance, participating types are entitled to share in the profits of the insurer, which are paid in the form of non-guaranteed bonuses.

In Singapore, you can use either cash or the Central Provident Fund (CPF) minimum sum to buy annuities.

Why is it important?

The most important benefit is the stream of regular monthly or yearly income payable at a specified age until death. Simply, the longer you live, the more you get.

It is a suitable instrument for consumers wishing to hedge and address the risk of living beyond their means.

In fact, some financial experts believe that every retiree who has just adequate savings should buy an annuity. This ensures that the savings can meet living expenses and last for a lifetime.

However, if the retiree has more than adequate savings and there is no risk that the entire savings will be drawn down during his lifetime, he can handle his own investments without having to buy an annuity.

So you want to use the term. Just say...

The recently announced CPF Life scheme is an annuity for CPF members to ensure a lifelong income.
Lorna Tan

6 Tips to Financial Freedom

You still have a couple of days to get your act together, before 2007 ends. Have confidence that you can still finish the year on a high note.

1. Align Your Investment Strategy to world economic movements

Re-balance: With all the market volatility this year, take a look at your Investment Strategy and see if you need to make any changes.

If you were planning to sell a fund, consider doing so just before it declares dividends. Prices normally drop after distribution. And you can generally find out when a fund expects to make its distributions by going to the fund's Web site. But of course, if the strategy taken is long term, you might want to hold and let price appreciate.

2. Increase Savings

It is always good to save up for retirement. Most of us tend to overspend at the holidays. This year, before you go for more shopping, why not spend some time thinking about how much you can really afford to give? Money may not be the most important thing: Pleasant memories last much longer. So, get creative about how you show your appreciation to your loved ones. That requires planning! Have a Plan on how you want to spend, add a list of how you want to give, holiday decorations, travel expenses, so forth. Finance, if planned early, can maximise savings.

3. Get your Will ready.

This would really be difficult. After all, who really wants to think about death? The most difficult bit seemed to be whom you pick to be guardians for your kids or trustees for your assets. Pick the best qualified person you can trust.

4. Have an Early Plan for the Kids' Education

Plan each step carefully starting from kindergarten expenses to Primary School expenses. Have discussion with your peers especially those with kids. They can save you alot of money and may even give alot of good advices.

5. Do a Tax Projection for the year

You need to know how much to "give back" to the government. From the TV tax to Property Tax to Personal Income Tax, you need to know how much is expected of you. And you need to get this ready before the taxman issues the letter. This can also help save alot of money as too much procrastination can result in forgetting to pay... and thus getting a fine as a result. Such heartbreaks are needless. Also cerain things are tax-deductible. Things like education can be tax-deducted. So if you are undergoing further education, please fill it in the tax forms.

6. Cut Down on Expenses

Know where the bulk of your expenses go. If possible, list all monthly expenses down and then try to reduce it. For example, if you can help it, refrain from taking cab rides. Take public transportation instead.

Tips on How the Wealthy Invests..and Create Further Wealth!

Investing tricks of the wealthy

Average investors can apply the same techniques to their own investments, no matter the size of their portfolio

RECENTLY, I asked a wealth manager whether an average investor can make more money by mimicking the investment strategies of the rich. He answered: not really. Later he explained that the rich invest differently because, well, they’re different. They can take more risks because they have more money to lose. Furthermore, they can speculate and have a short-term view because losing money is not a problem for them.

Patience is virtue: Great investors like Warren Buffett always invest in the long term. He held on to his investment in Washington Post for 33 years
Well, I do not totally agree with his opinion. For the past few years, I have been advising wealthy people on their financial well-being. As a financial adviser, my job is to help these rich clients search for financial services who meet their needs. Throughout my interaction with them, I have gained an insight into how they accumulate wealth.

I can tell that the rich don’t necessarily have any special insights into which stocks or assets are going to soar. But what they do have is the confidence to apply a disciplined and systematic approach to managing their money. They have the habit of applying common sense to each investment opportunity facing them. Even though the interests of wealthy investors are not always necessarily aligned with those of the average investor, there are a number of principles and strategies employed by wealthy investors that do apply to virtually anyone who seeks to invest for the future.

It is a common fact that most financial textbooks teach us that in order to build wealth we need diversification, wealth preservation and strategic growth. To me, this not an accurate statement in itself because two of those strategies - diversification and preservation - don’t help to build wealth. Perhaps the rich use these two strategies to maintain wealth.

After they have accumulated great wealth, they didn’t use the strategies during the accumulation phase and they tend to preserve the wealth they have built. Yet average investors have not yet reached the ranks of the financially independent, so they are generally more concerned about investment growth and losses. The wealthy, as a general rule, do not have this concern. At the same time, they also learn how to avoid taxes legally so that they can keep their money working for them and learn how to pass their assets on to the future generations without the government taking a huge part of what they spent their lives building.

Another common perception is that the rich take more risk, therefore they accumulate wealth faster. However, the truth is that the majority of rich people do not build their fortunes by speculating on high-risk investments as is commonly believed. My experience tells me that the rich do not heavily rely on high-risk investment vehicles like hedge funds or venture capital funds but are moderate risk takers who put more than half of their money into listed securities and keep a large amount as cash. The reason for this is that they have so much money that even if they do not meet their goals for investment growth, it would not be bad news to them; however losing their financial independence would be devastating.

So how do the rich invest? Unlike the average investor, the rich think long term in most of their investment strategies. They believe that there is power in long-term thinking and many of them make it habit of doing so. Great investors like Warren Buffett - his successes in investment include Washington Post Co, where Berkshire invested US$11 million in 1973 and which investment was worth US$1.3 billion at the end of 2006. That is 33 years of holding power which demonstrates his investment philosophy - always invest for the long term. Hence, most rich do not engage in short-term speculation but have a long-term goal in mind.

However, the rich make use of risk by taking advantage of risk. They often build fortunes using volatile assets and investments but that does not mean they were engaging in risky behaviour. They understand the risk and embrace risk because they know it always brings an opportunity for growth; however, the average investor is fearful of risk. Nevertheless, taking risk for the rich does not mean taking a shot in the dark. The rich take calculated risk that means to gain knowledge first and to consider the consequences of failing before taking action. The rich overcome fear with knowledge as knowledge can cause fear to fade away.

The rich also demand value for their money. Otherwise, how do you think they got to be rich in the first place? Value to them is buying assets at a discount to its intrinsic value. So for them the right time to buy is when there is weakness in the market. They buy when others are despondently selling and sell when others are greedily buying. This requires the greatest fortitude but also has the greatest rewards. This bargain-hunting approach to buying value will enable them to buy quality assets at reasonable prices. So they buy when there is bad news and sell on good news. For instance, some of the wealthy invest because they understand that the weakness is only temporary, and the stock price had fully priced in negative news and it was time for them to hunt for bargains again.

If we look back at the Singapore stock market, there are many opportunities for investors to bargain hunt and buy on bad news, e.g. the Asian financial crisis in 1997/98, the Sept 11 terrorist attack and SARS. The rich take advantage of these negative events to buy assets, whether in real estate or stocks and that’s where value can be found. However, the average investor will seek to sell and get out of a bear market fearing that the asset will fall in value.

To the rich, probably now is the best time to sell and get out of the market, where all assets prices have gone up in value. Over the past years, we have very good reports about our economic growth and all the good news are now factored into the stock price, so for the rich it’s time to sell.

Another investing secret of the rich is that they approach investing like a business. They set up a business plan, establish annual targets, then analyse the results and they have reasonable expectation. At the end of the day what they want to achieve is increasing their net worth and not their income. The rich truly understand the meaning of working smart not working hard: to focus on growing your net worth is working smart but working for an income is working hard. As their net worth grows, they do not increase their spending, instead they increase their investment. By repeating this over the years, once their net worth is built to a certain level, they are free to do what they want. Hence, to increase your net worth you need patience, knowledge, and wisdom.

Often they are not willing to pay more for investment services simply because they find a particular adviser to be charming or knowledgeable. Nor do they chase after the hottest manager or the most publicised fund. Instead, they go shopping for the best combination of reasonable fees and consistently good performance. However, they will pay for advice from people who have specialised knowledge in a field they need to learn about. They don’t believe in free advice as it can often be the most expensive advice.

As you can see, most investing secrets of the rich are nothing more than a combination of basic common sense and knowledge. The difference between the rich and the average investor is that they have the self-confidence to stick to the basics and to find out what they need to know. They don’t get caught up in the theory of the week or the trend of the month. It’s an approach that’s easy to articulate but difficult to follow.

However, average investors can learn important lessons from the wealthy, specifically the need to manage both risk and their own investment expectations. The failure to match expectations to the risk an investor is willing to take can result in frequent switching among investments, or even worse. Now the good news for the average investor is that you can apply many of the same techniques to your own investments, no matter how big or small your portfolio is.

Create WEALTH through Good Ideas..

Any idea how to put waste to good use?? And to top that: turn that into a million dollar venture?

Well.. here's a basic idea how Enviro-Hub's plant works:

1. Mixed waste plastic is fed to a reactor to be melted at 350 deg C.

2. A special catalyst is added at controlled intervals, whereby a process called depolymerisation starts.

3. The catalyst 'cracks' the polymers of the waste plastic, producing three by-products: diesel, liquid petroleum gas and coke.

See the full story.

Remember the earlier days back when I defined the few ways to get rich.... ?

The 10 Commandments of Investing

Dec 16, 2007
two cents'worth
Thou shalt heed these 10 commandments of investing
By Mark Bruno, AUTHOR


1. Acknowledge that your retirement is a reality, even if it may be 30 or 40 years away.

Your retirement will cost you more money than you could possibly imagine, and you don't want to wait and see if you can play catch-up.

2. Don't wait. Do something now.

You are not entirely on your own, but it is up to you to take care of yourself. Commit to saving just a small portion of each pay cheque for your retirement before you can spend it.

3. Whenever there is free money, take it.

If you are lucky enough to work for a boss who will make matching contributions to your retirement plan, take the money.

4. Treat your retirement as another line item taken out of each pay cheque.

Instead of making large annual contributions to your retirement, have smaller contributions automatically deducted from your pay cheque.

5. If you think you can't afford to save, you are probably wrong.

Even saving as little as US$90 (S$130) a month will help you begin to accumulate some serious long-term wealth.

6. Take advantage of the power of compounding.

The best investment decision you will ever make is to start saving money early. The younger you are, the more your money can work for you.

7. No matter how much help you think you might get when you retire, don't count on it.

There are no sure things in life and retirement, and your retirement is definitely your responsibility.

8. Understand the difference between good and bad debt.

Credit card debt is bad debt; you get nothing in return but more debt if you don't pay it off expeditiously. It erodes your financial independence and your ability to save.

9. There is no such thing as 'the point of no return'.

It is never too late for you to learn how to make smarter moves with your money. There are no stupid questions, only stupid decisions.

10. Don't save for tomorrow at the expense of today.

Do everything in moderation. Don't stay home every night because you are too scared to spend.

Excerpted from Mark Bruno's Save Now Or Die Trying, published by John Wiley & Sons.

The 10-Step Formula for Building Wealth through SAVINGS!

One sure way to get your finance ready for wealth building, is to cut your own wastage. SAVE that up to a sizeable amount. Then do your homework or engage a professional to do that for you. Invest that. And overtime, reap your rewards. Either that, or have an idea out. Have your marketing plan ready to interest any would-be venture capitalist and get him or her to invest in you.... That's a fast way!

Today, the discussion is however on: SAVINGS. This is invariably easier compared to convincing someone your idea's worth. Anyhow, a couple many times your savings can TOTAL UP to be substantial. Anyhow.. here goes.. this is an article written by Jeffrey Strain... NJOY!

Author: Jeffrey Strain

If you want to be wealthy, there is an extremely simple formula that has worked for generations: Live beneath your means and invest the difference.

It's such a simple formula that everyone should be doing it. While it takes effort and discipline to live below your means, doing so will help you achieve your financial goals and help you avoid debt and the stress that comes with it.

There is an impression that living within your means is the same as being tight with money and not being able to purchase the things you want. That impression couldn't be further from the truth. Being frugal simply means taking great care in the way you spend your money so that you can use it in the ways that you want to most. It means not spending it on an image, but instead on what is truly important to you.

Take Warren Buffet as an example. He's the second wealthiest man in the word, according to Forbes and could purchase almost any home in the world that he wants. Yet since 1958, he has lived in the same house that he purchased for $31,500 in Omaha, Neb. Even though he could buy a much bigger and fancier house, doing so apparently is not important to him.

While Buffett's frugal ways are not the sole reason for his riches, it says something about a man who has accumulated such vast wealth. Unfortunately, many Americans do not share the same principles. They have instead fallen for the false promises of advertising and the image that you can have it all right this instant.

According to the Federal Reserve, Americans carry nearly $2.5 trillion of consumer debt, which is almost twice as much as 10 years ago.

If you want to make sure that you are building wealth, here are 10 easy steps you can take toward living within your means:

1. Borrow: Not money, but products that you are unlikely to use more than a few times. Before you buy, ask yourself if it's possible to borrow the item you need. Many items such as books and language tapes all can be borrowed from your local library at no cost. A neighbor may have the tool you need that you know you'll need to use only on rare occasion. Borrowing, when appropriate, can save a large amount of money.

2. Buy used: While there are some rare exceptions, you are almost always better off financially buying used rather than new. Whether it's the books that you read or the cars that you drive, the price falls quite a bit the second that the item leaves the retail store. Today, with the Internet making the world smaller, it is easier than ever to find virtually anything that you need used. Getting into the habit of purchasing pre-owned products will save you thousands of dollars a year.

3. Never pay retail price: Before you purchase something, take the time to compare prices. If you do this when you do need to buy something new, you'll never pay full retail price. With rare exceptions, a bit of price comparing can save you at least 20% and often much more on virtually any product or service. This is especially important on big-ticket items such as cars, home electronics and appliances. Doing so can mean hundreds of dollars or more in savings.

4. Forget brand-name products: Brand-name products -- whether it's food, clothing or anything else -- have a premium price for the image they have created through advertising. You are paying the premium price for that image, not necessarily for a better product. Whether you have a $2,000 watch on your wrist or a $20 watch, chances are they both perform the function of telling you time pretty much the same.

5. Use credit only when you have money: If you believe that credit cards are for when you don't have money, you are more likely to be a slave to debt. It's important to use credit cards to your advantage, instead of having them be a financial liability. You should use credit cards only when you have enough money in your savings account to pay them off in full each month. If you don't, then you shouldn't be using them.

6. Wear it out: In the consumer nation that we live in these days, we often throw away things long before their useful life is over. A glaring example is trading in your car every few years for a new one. Well-built cars have a running life of more than a decade, and by using them until they are worn out, you save thousands of dollars compared to buying a new one every few years.

7. Use it up: According to a 2004 University of Arizona study, the average U.S. household wastes 14% of its food purchases. Of this, 15% is food that hasn't expired and has never been opened. The average family of four throws away $590 per year of meat, fruits, vegetables and grain products, according to estimates. This is just food. Add in the other products that you buy but never use up, and it can be well over $1,000 a year wasted.

8. Repair: When something breaks, many times the initial reaction is to replace the item. By learning how to make simple repairs yourself, you can save hundreds of dollars each year. Many products can be repaired easily, and an investment in a repair book (or one borrowed from the library) can pay for itself many times over.

9. Try homemade: In a nation of convenience, we have often have lost the ability to make things ourselves. Eating at home vs. dining out is a good example, but you can take it even a step further. Look at the difference of eating pre-made processed foods and making your own meals from scratch. Not only is it healthier, it will make your food budget last a lot longer.

10. Do without: We all believe that we need many more things than we really do. Take a few seconds to look in your closet, basement, attic and storage spaces. Most of that stuff sitting in there is stuff that you bought that you never needed. In the end, living below your means is about making priorities for your wants and establishing them within your current earnings. You can still have those things that are most important to you, in addition to building wealth for the future.

The Basics of Wealth Creation

The Basics of Moneymaking
by Ram Charan

Here's a question to test your prospects as a business leader: How does your company make money?

If you can't answer it, you're hardly alone. Many MBAs can't answer it. Many CFOs and vice presidents can't answer it. Experienced CEOs sometimes struggle to answer it.
What I'm testing with this question is your business acumen.

The Universals of Business

At the core of every successful business, from a global giant to a corner store, are the same fundamentals of moneymaking: cash, margin, velocity, return, and growth. And at the core of every successful business leader is an intuitive understanding of the relationships among them.
It's easy to think the basics of business are for beginners. Everyone knows what cash is, and that companies must make a profit.

But business acumen isn't about knowing definitions. It's about keeping the basics of moneymaking in sharp focus and balancing them in a way that's healthy for the business.
When you have business acumen, you realize the importance of every job at every stage of your career. A mailroom clerk with business acumen knows that getting checks to the accounts receivable department more quickly will ease the company's cash flow. And a sales rep with business acumen knows that higher-margin products will increase the company's return.

Moneymaking Basics

As the complexity of your job increases, it's easy to lose sight of the fundamentals. If your business acumen doesn't develop, you can stumble -- focus too much on revenue growth and overlook cash, or focus too much on cash and overlook growth.

That's why you should never consider it beneath you to revisit the moneymaking basics. They should be front and center in your diagnosis and decision making in every job you have.
Here are the basics:

• Cash

No business survives long without it. You should know how much cash your business generates and how much cash it consumes.

What are the sources of it? What drains it? What's the timing of the inflows and outflows and how is it changing? More revenues (sales) often means more cash. But growing a business consumes cash. How fast can the company expand without straining its cash flow?

• Margin

When people talk about the bottom line, they generally mean net profit margin -- the money the company earns after paying all its expenses, interest, and taxes. But gross margin is important, too.

Gross margin -- the difference between a product's selling price and what it costs to make the product (the "costs of goods"), expressed as a percent of the selling price -- can signal important shifts in a business. When PC makers saw their 32 percent gross margins decline to 20, they knew (or should have known) the competitive landscape had changed.

You have to know how changes inside or outside the business affect gross margin. Are there new entrants in the market who are winning customers? A competitor who's found a clever way to reduce costs and prices? A change in the pricing power of suppliers?

• Velocity

Velocity refers to speed, turnover, or movement.

How much revenue do you turn over, or generate, for each dollar of inventory? If you have $1 million in inventory for the year and revenues of $10 million, your inventory velocity is 10. This tells you how fast you're moving raw materials through the factory, turning them into finished products, and moving those products off the shelf to customers. The faster, the better.
Service businesses can track velocity, too. For banks, velocity of equity -- how much revenue is generated per dollar of equity -- is a useful measure. The concept applies to every business.

• Return

Margin multiplied by velocity equals return. If your return is lower than your cost of capital, your business is likely to be in trouble. That's when shareholders get concerned.
How do you boost your return? See if you can boost your margin or increase your velocity -- or, better yet, both.

• Growth

Every business needs to grow to stay in business. How do you grow in a way that keeps the other aspects of moneymaking in balance? There's no formula -- people with business acumen figure it out.

Where Business Acumen Counts Most

Street vendors in villages around the world use business acumen every day. They have to -- their next meal often depends on it.

In companies, business acumen is crucial when the external world changes and there's a need to reposition the business.

Like when Hollywood studios started selling videocassettes directly to the public at the same time it sold them to video rental companies. That's when Blockbuster's rental business started to slide.

People wanted to buy movies, not just rent them, so Blockbuster started selling them. But the moneymaking was completely different.

Blockbuster was used to buying videocassettes on credit and making payments with the cash from renting them. Returns were high.

Selling videocassettes meant laying out the cash up front, holding lots of inventory, and waiting for the cash to come in when the videocassettes were sold. Cash flow, velocity, and return were all adversely affected.

Where Do You Want to Go?

You don't need business acumen to make a meaningful contribution to a business. But you'll need it to rise through the leadership ranks.

You can't acquire it at a seminar or in a quick read. You learn it by using it in real business situations.

Start now by applying it to your company. Ask for the numbers or pull them from the annual report. Precision isn't necessary -- knowing what to focus on is.

Good Debt and Bad Debt

Nov 4, 2007

Handled well, debt can boost wealth and even cash flow. Lorna Tan of The Straits Times, offers tips on making debt work for you

ENJOY now, pay later.

This seems to be the carefree philosophy of countless big spenders in Singapore who rely on credit to fund their shopping sprees, vacations and wedding celebrations.

It might also explain some disturbing statistics that suggest many people are losing the battle with credit. For instance, the number of undisclosed bankrupts in Singapore has reached a record high of 25,500.

And another record: There are 5.45 million credit cards in circulation, weighed down by rollover credit card debt of $2.81 billion as at end-August. In fact, the figure is slightly lower than it was in June, when the rollover balance hit a record $2.87 billion, according to the Monetary Authority of Singapore's website.

To put it bluntly, many Singaporeans are still paying for meals they ate months ago and holidays that are now almost forgotten. And the trend is set to escalate as credit becomes more and more readily available, even to those with lower incomes.

Banks recently won the right to issue credit cards with a $500 credit limit to those who do not meet the usual minimum annual income requirement of $30,000. Moreover, an estimated 450,000 people who earn between $20,000 and $30,000 a year will soon be able to borrow without collateral from banks, although they will not be able to apply for credit cards.

Types of debt

NOT all debt is bad, say financial experts.

Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, says that 'good debt' tends to boost personal wealth and even cash flow.

To GE Money Singapore president and chief executive Iqbal Singh, good debts are loans incurred to generate positive returns or create value over time, through increasing one's earning capabilities and/or income.

GE Money gives loans to those earning less than $30,000 a year.

'For example, debts are good when used for purchasing assets or a house that will appreciate in value; and for education, as additional skills and qualifications are likely to increase one's earning ability,' says Mr Singh.

Debt is bad when it involves loans that are not affordable or sustainable, or when it is incurred for the wrong reasons - such as gambling. When a person stretches himself beyond his means, overspends and is unable to settle his loan repayments, the debt is considered bad.

He lands himself in a debt trap when late payment charges pile up, causing the debt to grow even bigger.

Loan considerations

MR KUO How Nam, the president of Credit Counselling Singapore (CCS), says that people should 'think very carefully' before borrowing.

Any sum borrowed has to be paid back from future income and anything that affects future income will affect one's ability to pay, he notes.

Before you take on any new debt, you should consider the following points.


1. What is the purpose of the debt?

Ask yourself if the loan is for consumption or investment purposes.

If you plan to indulge in an expensive car, the loan might become an unsustainable bad debt.

But if you want to pay for further studies that will boost your future earning prospects, it could be considered good debt.

2. Can you really afford it?

Carefully consider your other monthly payment commitments, both fixed and variable, before taking on new debt. Look at how much you will have to pay in total after you add the proposed new loan instalments to your existing commitments. Then ask yourself if you are still comfortably within your disposable income level, said GE Money.

Mr Kuo says a borrower must also examine how is he going to pay back the loan - in other words, he must assess just how secure his future income is.

Take the case of Mr Ronald Lim, who approached CCS for debt restructuring assistance when he was unable to service his loans. When he got married, he decided to stretch his finances and spent nearly to $100,000 on home renovations and a lavish wedding reception. His monthly salary was $3,000. After exhausting his savings, he ran up even more debt using his credit cards.

3. How are you going to repay the loan?

If the loan is to be serviced by both spouses, they must weigh the consequences should one spouse lose his or her job, or decide to stay at home to look after the children.

Said Mr Kuo: 'Some people find themselves committed to a lifestyle that requires two incomes.'

4. How high is the interest rate?

If the interest rate is 24 per cent a year, the standard rate for unpaid balances on credit cards, then forget it - this is not an option. There are cheaper alternatives. For instance, at GE Money, the monthly instalment for a $7,000 loan over three years is $260.

5. Do you understand the terms and conditions of the loan?

Some customers are not aware that when promotional interest rates are offered - say, 3.99 per cent a year - to customers who roll over their credit card balances, the offer is good for a specific period only. Once the promo is over, the rate reverts to the higher 24 per cent rate, the standard rate imposed on outstanding card debt.

6. How steady is your income?

If you earn a commission-based salary, your future income stream might be unsteady, so you have to be more careful when assessing your ability to service the loan.

7. What portion of your income goes to your debt?

Mr Kuo suggests that debt repayments should not exceed 25 per cent of one's income; otherwise, servicing the debt might become painful. If the loan is being serviced by both spouses and one becomes jobless, the other will have to take over the balance of the loan, so the debt to income ratio will double.

8. What happens if you cannot pay?

Just about the worst thing that could happen if you default on a loan is that you could be made a bankrupt.

Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, who is a volunteer at the Official Assignee's office, cites the case of an HDB flat owner who was made bankrupt by the HDB for not paying his HDB mortgage, even though the HDB is generally seen as taking a gentle approach in these cases.

Getting out of a debt trap

MOST experts advise clearing debts with the highest interest first. At the top of most lists would be credit card bills, which if left unpaid could easily double within a few months and lead to spiralling levels of debt.

However, if you are in danger of defaulting on, say, your home loan, keeping up your repayments for that might be more important than clearing debts with higher interest rates.

If you default on a housing loan, you might lose your home and face bankruptcy.

Borrowers should also consider other factors such as whether the interest rate is fixed or variable.

In addition, they should look at default interest rates and termination fees.

'We advise debtors to settle debts with variable interest rates first. These will bring greater certainty about the size of the debt and thus help facilitate debt-clearing plans,' said GE Money's Mr Singh.

Mr Scott Mitchell, a senior vice-president with ipac financial planning Singapore, advises maintaining a savings plan while paying off debts.

'Many people concentrate on paying off their debts before starting to save, or they will shelve their savings plan altogether.

'You should always save a portion of your money on a regular basis while you pay off your loans; this cements good saving habits,' he said.

How to win in the Game of Investing and Trading

Some of the tips that I have come across have helped me a lot in my investing and trading.

These guidelines not only have helped me stay in the game, but also to perform consistently in the market. The following are the compilation of tips from various sources on the net.

Personality: Assess your personality and decide if trading is for you? do you find it fun to track securities, prices and managing portfolio of stocks. Or do you consider trading as a chore? If you don't enjoy trading, you might be better off choosing someone else to manage your investments, like a Mutual fund or an ETF. On the other hand, if you can thrive on being analytical, then you can trade stocks directly or even options and futures.

Controlling Risk: Controlling risk is more important than any trading system itself. No matter what system you build, the system has to incorporate techniques to control the risk exposure.
Risk only a small percentage of total equity available for trading. When you take small risks and trade only a small amounts, you will have enough money to continue to trade and stay in the game.

Limit the overall portfolio risk to less than 25%. That is, keep the Maximum drawdown to less than 25%. Maximum drawdown is the measure of decline in portfolio value from its historical peak. The recovery percentage needed to come back from the drawdown is more than the percentage dropped. Hence limit the overall drop.

What is worthy: When looking out for new investing opportunities, your thinking should be: Which security is worthy of my dollars. Do some research to ascertain that a stock deserves your money before you invest in it.Use screening: Researching a stock takes time. Therefore use "Screening" that is available in websites like MSN, yahoo, etc. Use the narrowed down list of stocks to do the research.

Build a system: Depending on your knowledge about the market, build a comprehensive system that includes all the decisions that you would make before buying or selling a security. Regardless of how rudimentary your system is, use it to guide yourself make decisions. A simple system can be as simple as checking a few market parameters, industry parameters, company parameters and reading chart technicals. But use a system as your guide rather than your emotions. Know initial exit point before you enter a trade. When you know your exit strategy, one if the trade goes against you and another when the trade goes in your favor, you will minimize your losses and make consistent returns.

When the trade goes in your favor, lock in at least a portion of your profits. When trade goes against you, sell off the security before the losses become huge. Have an actual stop in the market; not just mental stops. You can use limit loss orders or stop loss orders for this.Spend 30 minutes a day to know the market condition, get a sense for market direction and to determine what dominant forces are acting in the market.

Trading Journal: Keep a trading journal where you note your losses, profits and your comments. Notice your trading patterns, analyze your strengths, your weaknesses and take corrective actions to improve your trading behavior.

Technical Analysis: After having done the fundamental analysis, use technical analysis to time your purchase or sale. Technical indicators are very useful to determine the overvalued or undervalued condition of the market. Get familiarized with important technical indicators like MACD, RSI, Bollinger Bands, Accumulation/Distribution, etc.

Buy on Dips: I have made it a habit to always buy on dips. Any small saving you can do in each trading will result in better percentage returns. Even if it is a bull market, lookout for retreats before you buy in.

Source: http://creating-wealth.blogspot.com/

3 Tips to pick the winning stocks

Investment can be one of the MANY WAYS one attain wealth..

Given below are some tips to help one pick the winning stocks:

1. Stock Research Report or Company Report

Get the Revenue figure of the company you are interested. What you want to know is whether it has steady growth evidenced by sales figure. Understanding more about the Cost of Goods Sold figure. This tells you more about the costs of all materials and expenses incurred in making the product. Rental in keeping stocks is not accounted.

2. Financial Ratios'

The few favourite ratios : P/E (Price to Earnings Ratio) , EPS (Earnings Per Share) and ROE (Return on Equity)

This ratio reveals about the value of a stock. The price of a stock divided by the earning per share is called the p/e ratio. Every stock has a trailing p/e and a forward p/e. The trailing p/e uses earnings from the past 1 year while the forward p/e uses next year's projected earnings.

Compare the current p/e with its historic p/e during its last 3 years. Try to "aim" for a stock with low p/e. If the p/e is high, its risky as it is more difficult to meet the high earning expectations of its shareholders. Companies with low p/e ratios usually operate in slow growth industries. Also mature companies wuth low p/e often pay dividends while high p/e ratios usually does not.

EPS :

This ratio reveals the growth of the stock. It takes what the company earned and divides it by the number of outstanding stock shares. This ratio is usually reported at the end of the year. But realise that this figure can be manipulated due to market pressure. Of course, the bigger this ratio is, the better.

ROE:

Some people consider this to be the "it" to measure the stock's success. This ratio shows you the rate of return to shareholders by dividing the net income by the total shareholders' equity. Big is good. Anything above 20 percent is good for me...

3. Sector Outlook

A few things must be enquired before compiling a list of stock possiblities

a) Does the company produce high end services/ products?

b) Does the company management have experienced/ qualified personnels in the industry they are in? (For me personally, I believe that in highly specialised fields, higher value added performance is obtained from people who are "skilled specialist" : That explains why Google is superb in the things they do )

c) Is the stock reasonably priced?

d) What about comparisons with the other stocks?

e) Does a company have patents to keep potential rivals at bay?

Topic: Create Wealth through Investments (Stocks)