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Monday, February 15, 2010Are you investing or gambling?
Have you read the parable of the talents?
It's a story about a rich man who entrusted three of his men to handle his properties before taking a month vacation on one of his Caribbean islands?
Wait a minute... is this "Deja Vu" of my "Blessing your blessings" blog?
Not really. I'm only borrowing the part where it says, "Immediately, Mikee went and traded with them and made another five. Likewise, Bon made another two."
In that parable, I always wondered how the first two servants were able to double their investment. Did they gamble? Did they invest their money in the bank? Did they invest it in stock market?
Based on my knowledge, they did not begin trading shares in companies, government and debt until the 12th century. But, what if they did have an underground wall street during the Roman Empire? Who knows?
Other than gambling, stock market is one of the fastest ways to double your money. Since I'm at it, let me ask you this question, is trading stocks gambling?
Before I answer this question, do you remember the incident last October 2008? People thought that most companies were losing its value. The result, people got skeptic on the outlook of all businesses resulting to a sudden fall on the market. That was scary.
My stock investments lost almost 30 percent of their value in a matter of days. Ouch! I said to myself, I'll keep it for a while. After a few weeks, the market crashed another 20 percent more. Double Ouch!
Most of the people I know were pulling out their money in the market. Big mistake!
Warren Buffet said, "Be fearful when others are greedy and greedy only when others are fearful."
What? Did I hear it right? How can anyone be greedy in a falling market!
I did not understand this before. It's easy to give this advice to others but when your own money is involved, it is hard to comprehend. Regardless, I followed Mr Buffet's advice. Right now, I'm enjoying a 125 percent increase in my investment. Not bad!
If that is the case, are stocks the best paper asset in the world?
Among all paper assets (stocks and shares, bonds, currency and cash), the stock market is the known fastest way of growing your money. It's also the fastest way of losing money and it is not gambling.
When you own stocks, you own a share of common stock in a company. In layman's term, you own the company. It entitles you to a claim a fraction of the profits that the company generates. Oftentimes, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.
Gambling, on the contrary, is taking money from a loser and giving it to a winner. No value is ever created.
Before you start purchasing stock shares, you have to know your risk tolerance before putting your money into this market. You have to have a very, very high risk tolerance because of its volatility.
Another thing to consider is your age. If you're in your late 50s and you want to increase your retirement through the stock market, think again and again and again.
When I got curious about stock market, I lost all my money on my first attempt. It was painful. I was in my late 30s when this happened. I took time to learn how it really works.
Remember, knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed.
One of the best things I learned in my experience is to never chase the market. That's why I became a "passive investor." I'll talk more about this later.
Keep in mind that stock market is not for everyone. Before buying anything, I recommend that you assess your risk tolerance. As much as possible, minimize your exposure into this market especially when you are nearing your retirement age. Unless you have a lot of extra money to spare, that is up to you.
If directly investing in stock market is too scary for you but you still want to take advantage of stock market investing, you can invest your money indirectly.
In Canada, we have something called RRSP or Registered Retirement Savings Plan. In the US, this is similar to 401k. In the Philippines, I'm not sure if they have this. As far as I know, you have to build your own retirement savings.
Anyway, if a person owns an RRSP or 401k, the company where you have this account normally invest them in mutual funds or segregated funds. (There are other types of investment vehicles that you can use but in this blog, I will only focus on these two.)
Like mutual funds, a segregated fund is money invested in the following markets. (1) Bond funds, (2) balanced funds, and (3) equity funds. Bond funds are invested in government bonds. Equity funds are invested in the stock market. Balanced funds are invested in both bonds and the stock market.
If you invest in equity funds, the insurance company buys shares in the stock market. You don't do anything. They do the buying and selling. They do the work and charge you a management fee, they call this MER fees.
This is where their similarities end. Because a segregated fund is administered by Canadian insurance companies, when you invest in segregated funds, you are actually buying an insurance contract. It offers certain guarantees to the policyholder such as return of capital guarantee up to 100 percent. It is creditor protected. It by-passes probate fees when it flows to your beneficiary.
If before you were after return on investment (ROI), after the market crash of 2008, people are now after their return OF investment. This is where segregated funds are worth considering. The only drawback of this investment is its fees. But is you ask me, I would rather pay that extra fees rather than losing 30 percent of my principal at maturity.
If you want to know more about this product, ask your licensed insurance advisor about this.
I have segregated funds four years ago. When the market crashed, it didn't matter much even though I was losing more that 35 percent of my principal investment. It's that guarantee that gives me a peace of mind.
If this does not look appealing and you still want to invest your money directly in the stock market, you can do that by using a stock broker. If that is too old school for you, nowadays, there are a lot on-line trading platforms where you can trade by yourself. This is a lot cheaper. This is what I do.
There are two ways to be in the market.
1. Active Trading
Active trading is all about timing the market. Through careful analysis, active traders know when to buy and when to sell. If you cannot do this full time, I do not recommend you to be one. Being an active trader requires a lot of time in studying the market and the type of business. Without this careful study, active trading becomes nothing else but gambling - a game of chance.
2. Passive Investor
This is buying and holding stocks for a long term. The one important thing you need to know is the value of the company. Having just a little knowledge, because it is better than none, is enough to invest in the stock market.
After reading my blog and you still find yourself confused, don't fret, if you don't have the time to fully understand what to do with your money because having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.
By the way, since tax season is around the area, just a caution. Don't be tempted to use your refunds in getting investments that promises crazy returns. There will be someone out there who will take advantage of "instant money" or "get rich quick scheme." That is gambling.
The scripture says, "Wealth obtained by fraud dwindles, but the one who gathers by labor increases it." (Proverbs 13:11)
Make sure you are dealing with a licensed advisor when investing your money. These licensed advisors have errors and omission insurance that protects you, the investor, in case of fraudulent activities and negligence.
If you think it's too good to be true. Stop and think about it.
If you think you're too young for investment planning, think again.
Don't just watch others make it happen.
I want you to make things happen.
I want you to be successful.
Wherever you invest your money, I pray that your investment performs well and may you achieve your financial goals in life.
Happy investing!
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