Stocks versus Unit Trusts – What are the Similarities and Differences?
Yeah! It’s the time of the year where people have already planned (and went) their holidays, made out a long list of items to buy (to pamper themselves or just anybody in mind) and collecting their well deserved bonus!
And in the usual Financial Planning sense – if you are one of those who are fond of spending away your bonuses (without even thinking and planning), here are a few tips that you may wish to consider to do so first before happily spending (or wasting) it away…
Note: the tips here are meant for your own good and really to help you with your future. Tips mentioned here are not in order of priority as well.
Five Good Tips To Help You With Your Year-End Bonuses
#1 Think Of Your Previous Purchases (Pampering)
Throughout the year, there have been many various types of sales events and the ease of buying things online has even became easier. If you have made your purchases during those times – it’s time to hold your expenses and think twice before spending your bonuses away. You may wish to consider saving a major bulk of it. If you find it hard to do so, just tell yourself you may get to spend a bit more from this saved amount in next year’s sales events.
Have you checked out your local banks’ websites (notice the ‘s’ for the banks) and their revised interest rates for having a normal savings account with them?
If you have not… please do check them out now and come back to this post later… because if you have always depend on your savings account to plan and fund your retirement, it’s time to think twice and plan otherwise!
For The Privileged Few Who Keep Their Earnings In The Banks
I do know of a few friends and acquaintances who are earning way beyond their means and they are good with their personal finances and planning as well, therefore even though the Banks are not giving them “that good” interest rate, their own earning abilities will help them through…
But if you are still working towards being like them… you can consider taking on these few suggestions to help you make your money work harder! They are not guaranteed to work for everybody but if you are persistent enough, they may just work well for you along the way!
A Lesson First – What Does The Interest Rate Work For Your Money In The Bank?
Back when some Local Banks can still offer an interest rate of around 1% per annum, if you manage to have $10,000 with them, you can see a good $100 being given to you as a form of interest at the end of the year. And if you keep that amount + interest for another year, you will have an additional $101 being added on. May not seem significant but if you do the calculations, the additional amount will just keep increasing as long as you do not touch the money!
The additional and increasing amount that’s being given to you is due to the Magic of Compounding Returns and because of the number that’s being attached as the Bank Interest Rate.
Secondly, if you want to know how long it will take for this $10,000, you can use the Rule of 72 to calculate the estimated number of years needed with that interest rate. Simply take 72 to be divided by 1 (the interest rate) and you will simply get 72 years! Don’t look too shocked as yet!
Now… When The Local Banks Decide To Lower That Interest Rate To An Even Lower Rate
When the interest rate is lowered down to just 0.1%, your $10,000 is just making you $10 a year (instead of the usual $100) and it’s also taking 720 years for that money to double! You can look shocked now!
So is this how you want your hard-earned money to work harder for you? If not, it’s time to make some adjustments and take on some of these suggestions…
How To Make Your Money Work Slightly Harder…
#1 Put Your Money Into Fixed Term Deposits With Local Banks or Foreign Banks
You can start shopping around for Fixed Term Deposits with different banks. Not all banks offer the same interest rate throughout, so it’s advisable for you to check out the different rates being offered. For example, I have came across Banks from India (but having their offices in Singapore) that offer slightly higher interest rate as compared to local banks.
#1.5 Put Your Money With A Foreign Country
This little tip is shared by one of my clients who operates a business in Vietnam. Because he works and stays there most of the time, he is able to open a bank account over there and guess what… the interest rate for their savings accounts is, on the average, a double digit per year!
If you do have the chance to work overseas for awhile, it’s advisable to check out this opportunity! But do take note of the terms and conditions attached to it.
#2 Put Your Money Into A Single Premium Plan With An Insurance Company
You may not get a double digit interest rate but you will definitely get higher interest rate as compared to a Fixed Term Deposit, given that you are comfortable with setting that money aside for a longer time frame.
If you are into investing with shares, you would have came across or learned about the above three phrases:
– Buy And Hold
– Buy And Sell
– Sell And Take Loss
I am not a Professional Stock Investor and I have not really made Thousands out from my investments. But I am starting to understand the significance of the above three phrases through my personal in a negative manner and I wish to share what I know about them with this post.
If you are just starting to go into shares, you may wish to take note of them and I hope this can be useful to you!
1. Sell And Take Loss
You can have a good laugh at this. When I first got into shares in 2008, all I knew was Demand vs Supply and the impact of Inflation that will drive up the share prices. These are the two schools of knowledge that I apply to buying of my shares.
So I bought into a Stock that’s around $0.25 for 10 lots (10,000 shares). That’s a total of $2,500 not inclusive of the charges. The economy did not turn well for this company and the shares started to go downhill. And there’s no sign of it going up again.
When the share prices dropped by the 10 – 15% range. My friends recommended me to sell them and take loss. Being a sore loser by then, I did not give in and told them off that with time and Inflation, the share price will naturally go up!
Long story short, that company’s overall business did not improve. Shares dropped to the current range of $0.025. My current loss is at $2,000+ range. I am still holding onto it, because I do not need the money (which I may still be silly) and really hoping that the situation will have a turnaround (another silly thinking) and I can sell them off to minimize the loss.
Lessons To Learn From This:
- There’s no winning stocks every time. Shares go up and down depending mostly on the economy and the management behind the company and not just because of demand and supply and inflation.
- If your stock buy is experiencing a loss and there’s no sign of it going up again because of many factors like the annual reports have been bad – learn to sell and take loss. It’s painful but you can take this money and invest in other shares that will give you better returns and cover your initial loss.
- Set a benchmark for your stop losses. Some people recommend a loss of 10% to the maximum of 20%. Once you have this, follow through and apply to your investments.
2. Buy And Sell
2010 is coming to an end soon and we will be welcoming 2011 in around 11 days time! And before the year ends, this is a good time for you and I to look into our Financial Planning.
What Are The Areas That We Can Look Into?
In simple terms with regards to Financial Planning, as long as it involve some form of monetary sense, it’s always good to look into. And if you like to know something concrete, here’s a list of what you can start looking into:
>> Your Financial Investments
Financial Investments would include your Investment-Linked Plans, Stocks, Shares, Unit Trusts. This can also include your investment properties (though not much changes can be done in the physical area). And basically, you will need to know with the past and present economical changes, how has it impacted your investment portfolio?
You may ask yourself these questions:
– What Am I Doing These Investments For? Retirement? Mid-Term Wealth Accumulation? On Impulse? Answers to these will help you to keep track of your final objectives.
– How Are My Funds Performing? As compared to end 2009 and now end 2010, how’s the performance been? Any changes needed to make sure that I am on track to my objectives?
– Do I Need To Pay Particular Attention To Any Investments? This will better prepare yourself for 2011, keeping track of funds that need your most attention will make sure you will not face any last minute economical shock.
>> Review Insurance Portfolio
As you know, part of a good Financial Plan, would include having instruments that help you to
1. Make your money work harder (not you working hard to make the extra dollar) so that you can achieve your goals faster and having adequate savings for your retirement
2. Beating the inflation (when the price of a certain good increases by a X%, the interest rate on your savings/investment account is more than X%, that’s beating inflation)
There are common methods to help you achieve the above like Investment-Link Plans (through Insurance Companies), Investing into Unit Trusts (through Financial Institutions or Brokerage Firms) or through Stock Trading (On your own and Trading like Warren Buffett).
And for the purpose of this post, I would like to recommend the method of Stock Trading with the introduction of two books, that I have personally read, that would help you to learn the Basics of Stock Trading.
These two books are :
- Ho Kok Mun’s How To Make Money From Your Stock Investment Even In A Falling Market
- Adam Khoo & Conrad Alvin Lim’s Secrets of Millionaire Investors