Buy Low, Sell High

Be honest now! Has this ever happened to you?
You've clambered onto a roller coaster, as part of a dare or simply because all your other friends have rushed aboard. You then tried your hardest to make sure the terror in your heart is not betrayed by even the slightest tremor on your face!
Unfortunately, very soon after the ride began, you felt your stomach stay at the top of the rise even as the rest of you hurtled down?
  

Well, if you’re a glutton for punishment - and adrenalin-inducing thrills - you’ve probably done that more than once, sometimes in the same afternoon, while on holiday in some magical place like Disneyland, perhaps. Intriguingly, there are great similarities between the emotions felt during a roller coaster ride and those experienced during periods of great investment volatility.

I can say that with confidence because I've gone on my fair share of roller coaster rides, mainly in the US, and I’ve spent many years observing, participating in, losing and gaining at the serious game of equity investing, primarily in my home country of Malaysia. 

I’ve lost money as markets crashed, and made money as those same markets recovered.

Through all my travails, what I’ve learnt is that when it comes to riding the investing ‘roller coasters’, my emotions are not the best barometer to guide my actions.

Let me tell you why:

When markets are high, I tend to get greedy and feel the urge to jump in with even more money.

When markets are low, I suffer pangs of fear and panic that cause me to want to bail out.

And I have done both often enough to realise that those courses of action are usually the wrong things to do at those times. In hindsight, it almost always seems the best course of action would have been to do the exact opposite of what my gut feelings were shouting out for me to do.

Now, Confucius once pointed out, “A superior man is the one who is free from fear and anxieties.”

I’m inclined to agree with that ancient Chinese sage, but the truth is when it comes to investment markets, only two emotions tend to reign supreme - fear and greed.

And both breed anxiety!

Therefore, if you want to have just as an exhilarating a time in the investment market over the long-term, as you do on a wild roller coaster over the short-term, put in place strategies that allow you to exercise almost Vulcan-like control over those pesky emotions!

 And, if you lack the self-discipline of Star Trek’s Sarek, Spock, Tuvok or T’Pol, as is the case for almost all humans, then embed strategies that allow you to distance your investment decisions from those emotions.

In my day-to-day work as a Securities Commission-licensed financial planner in Malaysia, I utilise two strategies called dollar-cost averaging and value-cost averaging that allow investors to protect themselves from their own highly developed tendencies to give in to fear and greed at the worst possible times. 

You already know that the oldest formula in the world to make money in business or investing is to buy low and to sell high.

Frankly, in the game of growing long-term wealth, nothing has ever been invented that can beat that easily understood strategy.

Whether it’s wheelbarrows or widgets, pharmaceuticals or paper assets, the only way to grow rich is to buy low and sell high.

Thankfully, in the investment world you can employ excellent strategies like dollar-cost averaging and value-cost averaging to effectively buy low and sell high.

In the case of dollar-cost averaging, you invest equal amounts of money, at equal intervals, regardless of market conditions. The net result over many years is that you end up doing most of your buying at the lower end of the price fluctuation band.

You end up buying low.

You then can wait for a time of market strength to sell high!

Value-cost averaging is similar in concept to dollar-cost averaging, but instead of investing equal amounts, you invest variable amounts that are (kind of!) inversely proportional to the market level. So the higher the market is, the less you invest, and the lower it is, the more you invest.

But if all you have today is a small amount of money to start with, I would urge you to save a bit of that money in the bank each month to build up your emergency buffer account, and then invest the rest in a proven mutual fund or unit trust fund, which is an investment vehicle that pools or collects relatively small contributions from many investors with similar financial aims.

The key thing is to get started.

Procrastination may be best known as the thief of time, but in the world of personal finance it is actually a much more effective thief of future wealth!

Don’t let it rob you... blind!

My advice:

Act today – increase your knowledge, save your money, and commit to becoming a lifetime investor!

Intelligent Borrower or Economic Slave?

Is it possible to live in our 21st century and stay out of debt? Most people would say no. Yet, there are those who are debt-free.
But even then, is it desirable to totally eschew or abstain from debt when it seems as though the global retail economy is powered by rising levels of consumer borrowing?
To answer that question intelligently, the first thing you should do before you read anymore is ask yourself whether you believe debt is a curse or a blessing. Well?
I've found a large part of my work as a licensed financial planner, consultant and professional speaker revolves around urging people to extricate themselves from the clutches of clinging debt!

Because of that, many people assume I believe all debt is bad... even downright wicked. Yet, nothing could be further from the truth.
  

In all fairness, though, I'm sure the title of one of my books, Liberty! From Debt-Slave to Money Master, helped entrench that 'Rajen-thinks-all-debt-is-bad' perception among many who've heard of that book but have never read it.

The truth is few things in life are correctly viewed in monochrome! And debt isn't one of them.

Most of life involves the full spectrum of colour and hue. That includes the emotive subject of debt.

Just like fire, debt can be a great friend if properly harnessed. But, also like fire, it can scar you for life or even permanently snuff out your breath if it is permitted to rage out of control.

Liberty! teaches - in stories involving three young men - principles and strategies that work well for those who want to get out from under the sometimes overwhelming burden of consumer debt.

In most countries, typical consumer loans are taken on for years at a stretch to buy items that go down in value, sometimes precipitously during just the course of the outstanding loan!

In most cases, for most people, I believe too much consumer debt is indicative of a well-entrenched inability to exercise one of the key criteria for long-term success, a commitment to delayed gratification - the willingness to give up something good today in anticipation of something far better tomorrow.

Embracing a philosophy of delayed gratification is, at least in my opinion, indicative of a person of superior emotional intelligence.

Mature people can exercise delayed gratification with regard to consumer items. Immature people can't, won't or simply don't!

The dividing line often has little to do with chronological age.

Yet I believe there is one type of debt that - under the right circumstances - can be productive.

It is viable business debt, although even here intelligent restraint should be used!

In this instance, money may be borrowed, say at 10%, to engage in productive economic activities that yield perhaps 30%, 40% or more.

The ability to do this again and again leads to burgeoning, upward spiraling profits, which are the cornerstone of sound, vibrant capitalism and the goal of all self-respecting capitalists.

Still, let the record show that I vehemently disagree with the oily character Gordon Gekko played by Michael Douglas in the iconic 1980s movie Wall Street. In it, Gekko declared, "... greed, for lack of a better word, is good. Greed is right. Greed works."

Not to my mind. Not now, not ever!

I believe unadulterated greed is cancerously evil. But a healthy desire for profits, as long as they are achieved by ethical business practices devoid of gouging others, are not merely good, but wonderful.

After all, the fair exchange of useful goods and services for money is the cornerstone of a healthy economy. For instance, a simple, personal example where I exchange an understanding of the principles of sound time management for money is found at this page which features another of my books, this one entitled Unshackled.

Our entire way of modern life is centred upon the benefits of profits earned honestly.

Bernard Baruch described it best, I think, when he wrote, "Society can progress only if men's labour show a profit - if they yield more than is put in. To produce at a loss must leave less for all to share."

If you believe Baruch's statement, and I believe it is wise to do so, then for your own sake make it a point to sit down tonight - there's nothing like striking while the iron is hot - to figure out how much you owe and to whom. Do all this figuring on a large sheet of paper.

As you do so, identify which financial debts are productive, good business-type ones, and which ones are the more common destructive, consumption-type that only make financial institutions richer at your expense!

Then embark upon a focused programme of debt-eradication within the second group.

For this part of the exercise, here's what I suggest:

1. List all your debts on another, fresh sheet of paper;

2. Then decide whether you want to  adopt one of two great strategies:

a) Paying off your debts in order of the most expensive ones (meaning those with the highest interest rates) first ; OR

b) Paying them off in order of the smallest ones first.

The first strategy (2a) is mathematically more efficient, but I have found the second (2b) more emotionally satisfying.

Use the first if you're super-disciplined. Use the second if you're like most of us mere mortals and in need of quick reinforcement through positive feedback!

In closing, I wish you all the best in crushing the monster of excessive consumer debt and thus rescuing your future income streams from being devoured by this implacable foe.

Soar As High As You Like - But For God's Sake, Get Your Safety Net In Place First!

Have you ever been to the circus and watched aerial artistes go through their motions on a high wire act?
If so, you should also have noticed, at least in passing, that the safety net strung out directly below the acrobats serves a seriously important function!
Similarly, to succeed in our financial lives, we too need a 'safety net'. My advice to my consulting clients and to audience members, when I speak professionally, is to establish just such a cash buffer.
More specifically, I urge people I care about to establish a reserve fund of between 3 and 12 months' regular expenses. I usually call this reserve fund or cash buffer or economic safety net an emergency buffer fund. Its fundamental purpose is to provide both fiscal and emotional stability during times of personal economic upheaval.

You see, for most of us normal people, our biggest asset is not anything that shows up in a conventional net worth statement.

A net worth statement is nothing more than a simple listing of material assets and liabilities, which allows for quick calculation of your net worth position. It’s quick because your net worth is mathematically derived by this simple formula:

NET WORTH = ASSETS minus LIABILITIES

Typical items that show up on the plus side of a net worth statement are key assets like cash, stocks, mutual funds or unit trusts, vehicles, gold, real estate and jewelry. Normal liability line items are home mortgages, credit card balances, car loans and family loans.

All these are important, but the biggest asset a person has is not one of the key assets I've just mentioned. No! The biggest asset for most of us is our capacity to earn money for 20, 30 or 40 years at our jobs.

Yet, let’s face it, virtually all of the money most of us will ever earn evaporates into the financial atmosphere as personal expenses, interest charges and taxes.

Clearly, to be successful financially, we have to reduce that seemingly persistent rate of evaporation. Let me be blunt:

Our long-term future wealth can only be built from the bricks and mortar of the financial surplus we set aside each month.

This surplus should usually be invested in assets that fluctuate in value. (This is closely tied to the concept of investment risk. If you would like to learn more about that intriguing subject, click here.)

It has been historically proven through more than 200 years of equity market data that those most able - both economically and temperamentally - to ride the ups and downs of markets are the people who tend to accumulate the most wealth throughout their lives.

Yet, to successfully ride those nerve-wracking but eventually profitable fluctuations, you must have a safety net, the strong strands of which are made of cold hard cash. This safety net is your emergency buffer account.

However, if you’re concerned that you don’t know enough about investing to risk putting down real money in real investment markets, then what you need as much as an emergency buffer account is an easy, personally activated education programme.

My FREE ebook 26 Books to Take YOU All the Way to the TOP! is just such a resource, which is aimed at helping begin a five-year self-study programme in personal finance, economics and investing.

Now, as I was saying about the ups and downs of markets, you will find that fluctuations in investment asset values usually go hand in hand with the dips and rises of the general economy.

The perverse side of Nature that has caused Murphy’s Law (‘if anything can go wrong, it will’) to gain such wide prominence is that in most cases when you need extra cash because of a downturn in your personal, internal economy, the entire external economy also chooses that moment to falter.

The only way to safely ride the bumps in our economies - general and specific - is to have our financial safety net in place.

So, look at your own circumstances, check your various bank balances, other savings and investment balances and figure out just how long you can last if a catastrophe takes place today that stops you from actively earning a living for one full year.

Be honest now, can you last a week, a month, three months, six months, nine months, or a year?

Only you can answer that question.

I hope you do so because the answer you give the person you see in the mirror will help you confront honestly where you are in your life’s financial journey.

Again, your willingness to invest resources in educating yourself is directly correlated to your chances of long-term success in the financial arena. If you see yourself as a rookie in this field, then my very first book, Your A-Z Guide to the Stock Market – And all You Need to Know About Capital Terms, is a great resource. It contains 1,001 terms that are usefully cross-linked to help you take a self-directed journey of financial self-education. (You may learn more about it here.)


PRACTICAL STEPS YOU CAN TAKE!

Here are my guidelines on emergency buffer establishment for your consideration:

If you are employed by an established, healthy company that is unlikely to go bust anytime soon, put in place savings amounting to between three and six months’ normal expenses. If your boss loves you to bits and can’t get along without you, three months is plenty. But if your boss would love nothing better than to tear you to bits and spit out the pieces, err on the high side!

If you are self-employed, running your own business, make sure you have at least six months’ expenses available in savings if your business is in good shape with many clients who pay on time. If business is shaky, then opt for an increased buffer size. Having a full year’s reserves is generally more than enough for most people.

Warning: It may take as long as three years to build this buffer. So, keep at it and save diligently.

And remember, your emergency buffer is for emergencies, not for exciting ‘opportunities’ like a great sale at the local department store! Having your buffer will give you financial stability, which will quickly morph into emotional stamina during otherwise traumatic periods in your life.

Also, your enhanced financial stability will help you weather the ups and downs of the investment markets.

Just one point before I conclude: If you currently have very little saved as a buffer, you are in a financially precarious position.

It is imperative that you reduce your near-term expenses and build up your reserves as fast as you can to your targeted sum.

For most people, doing so usually takes anything from 12 to 36 months. It’ll be a long slog, unless you suddenly have a massive bonus land on your lap or have an investment rise suddenly in value and are savvy enough to take some profit and park it within your buffer fund.

Do yourself a favour. Don’t bank on or hope for some strange occurrence to provide you with the funds needed to weave your safety net. Just do the work and set the money aside in a safe place where yields may be low but certainty of being able to get your money back is absolute.