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Plan your way to wealth

singaporegal
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16-Jan-2007 11:05

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Hi sohguan,

Trading > $1 does require more capital than penny stocks. But it doesn't mean that stocks above $1 are more for mid to long term investors. As long as a stock can be more or less predicted by TA, that is enough.

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sohguanh
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16-Jan-2007 10:41

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For specialisation like sporegal did with only > $1 you find yourself pretty nothing to do since most recent surging stocks are penny stocks in your definition. So the recent trend only strengthen the belief one should diversify.

By buying > $1 stock you tied up a lot of your capital if you don't let go. Unless you go for CFD or go for contra tactics, I tink trading > $1 stock requires huge capital which I believe > $1 stock are meant MORE for mid to long term investors than speculators.

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singaporegal
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16-Jan-2007 10:32

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Haha... surprise surprise.... I'm glad to see even FA people agree with me on diversification!

Agree with elf... diversification is good if you're a big fund manager with loads of cash to throw around. But for retail investors, diversification is one surefire way to an average life!

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bradical
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16-Jan-2007 10:29

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The concepts of asset allocation & dollar averaging (monthly payments to average down the cost of fund investment) advocated by some fund marketing companies can be dangerous.

Why would you want to move your funds to lower cost assets or funds with falling prices if the price trend for these funds/ assets are falling? It is better to wair for a few months uninvested than to put your money into falling assets.

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geojam
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16-Jan-2007 09:56

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My finance lecturer in uni tell us all the good things of divisification.

later on in life i learnt that the way for me forward is to pick maximun 3 stocks.Do all your research properly(TA and FA).But for me i go for value shares.

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geojam
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16-Jan-2007 09:55

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dfusion
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16-Jan-2007 00:51

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I'm sitting on the fence. I believe that diversification is good only for people who don't know how market work. It beats putting their money in the banks. However, there is minimal understanding of economy at large and how the market work, of course with TA and FA expertise, i believe that the stock market can be wonderful place. :)

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elfinchilde
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15-Jan-2007 23:01

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complete agreement.

my personal take is that diversification reduces risk but overdiversification dilutes profit.

and yes. you diversify only if your holdings are so huge that you have to hedge against unnecessary risk. if you're just starting out, you _have_ to take chances. how else to grow a sufficient seed fund to start the road to financial independence?

having said that tho, there's still a difference between a disciplined, consistent trader who knows what his long term goals are, and a heck-it-all gambler who just buys/sells on tips, hearsay etc.

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iPunter
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15-Jan-2007 21:32

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That is something I absolutely agree with without reservation. Diversification is beneficial only when one has a substantial amount of money to put in stocks and would like to protect against it's erosion.

But traders normally have comparatively limited funds to begin with and need to maximize returns from these limited funds by being efficient in the use of such funds. Hence diversification will be of dubious benefit to a trader.

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singaporegal
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15-Jan-2007 21:16

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For the sake of debate and at the risk of being blasted by FA people, I would like to say that over-diversification leads to mediocre results.

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lg_6273
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15-Jan-2007 20:58

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Plan your way to wealth

DANIEL BUENAS takes a look at the importance of investing for the long term and discusses some of the benefits of not just aiming to get rich quick

FOR many, the dawn of a new year is about making resolutions and plans to improve oneself. With the start of 2007, we'll take a look at one of the most important life skills that an investor should develop: plotting out your financial plan.

It's something that should be reviewed at least once a year, if not more often, so that you know where you are headed with your investments, your spending versus your earning, and your overall financial objectives.

Financial planning is a broad topic that covers a number of different aspects, including protection (think insurance), investing, and retirement preparations. At every stage of life, our financial needs will differ, but there are some skills which will help us out no matter what our goals or plans are.

This week, we take a look at the importance of investing for the long term and discuss some of the benefits of not just aiming to get rich quick (although the two are not entirely diametric opposites).

SLOW AND STEADY

It is clear that, while it is tempting to trade frequently in volatile investments in the hope of making quick, large gains - sometimes called punting - one is far more likely to produce better results with a well-disciplined, measured approach to building your own finances.

'Most people have more success in growing and preserving their wealth by clearly identifying their financial goals and them meeting these goals through a well-considered and carefully maintained portfolio of investments that grows steadily over time,' says The Citibank Guide to Building Personal Wealth.

For one thing, long-term investors ride our volatility. A look at most stockmarket indices shows that, while there may be short-term ups and downs, there is an overall upward trend.

An example, listed below, in the Citibank guide on the S&P 500 - which tracks 500 major US stocks - shows how this works.

And if you think you should hold off investing, it is important to remember the power of compounding and growth.

As a simplified example, if you invest $20 a month in a mutual fund from the age of 25, and assuming that you receive an average annual rate of return of 8 per cent before inflation, this would be the value of your investments:

At age 35 - $3,685

At age 45 - $11,860

At age 55 - $30,005

At age 65 - $70,285

And the total investment you would have made at age 65? Just $9,600.

Now, before you rush out and put all your money into mutual funds, let's look at another key investment concept: asset allocation.

As the Citibank guide puts it, asset allocation is looking at your wealth as a whole, and then deciding how to apportion it to achieve the best overall return at an acceptable level of risk.

'Focusing on the performance of individual investments is less important than monitoring the overall return of your portfolio,' the guide says.

Different asset classes - for example, stocks and bonds - tend to have a low correlation with one another, which means that their performance is not closely linked.

'The main aim of asset allocation is to spread your investments across asset classes that have a low correlation in order to reduce the volatility of your overall returns,' the guide says. 'A balance of investments with low correlation makes your overall return each year steadier and more predictable.'

SAFER TO DIVERSIFY

This brings us to the concept of diversification. Putting all your eggs in one basket may mean that you could make a killing - or that you could conversely make extreme losses.

Let's look at a couple of scenarios, with a $1,000 investment between 1999 and 2003.

The above example considers what would happen if you had invested that full amount (100 per cent) in a global stock portfolio, and compares that to a more diversified portfolio of 60 per cent global stocks, and 40 per cent global bonds.

In this case, a diversified portfolio of global stocks and bonds produced a positive return, compared to a small loss in the non-diversified portfolio.

While it is true that putting 100 per cent into global stocks meant higher returns at certain points in time, one can see that the volatility of the diversified portfolio was less.

In other words, throughout the period, the value of the diversified portfolio did not alter as dramatically as the value of the 100 per cent stock portfolio.

Information for this article was taken from the book The Citibank Guide to Building Personal Wealth

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