Economy Politic Finance Quadrant

There are 2 BIG main external factors affecting our investment decisions

• Economy
• Politic

When the time is really bad (economy downturn and politically unstable), its best to park your money under something that is really stable, ie Gold. Which is by definition usable anywhere you go in anytime.

When its good time, invest direct to the stock market would yield very good return.

When the economy is not so good in a strong country, the government bonds or related money market would be able to yield higher return than just gold.

However, the most dispute solution in good economy unstable country is investment in property. This is mainly due to easier rental and higher chance of capital gain.

By simply moving money around depends on the political and economy situation, one was able to achieve more than 12% compound return for the past 20 years. That is equivalent to a 10X return.

But by no mean this is easily done. Some of the concerns include;

• how would one know exactly when economy/politic turns good/bad ?
• is Gold the ONLY option ?
• property may not easily liquidated
• how to choose which property or stock market ?

. . . which can be explored further.

Risk revisit

The toughest concept for this blog to get across is the preception of Risk.

This blog preaches that "High Return High Risk" is NOT the entire truth but comes with a twisted myth.  Basically that statement only apply to those who don't know much.  The more you know, the less risk it is.  The correct way of intrepreting Risk will affect another general miss-conception - diversitifaction - "Don't Put your egg in ONE basket".  Putting your eggs all you want but you will have to start with ONE and that better be the best one.

These intrepretations offer explaination to today's situation why so many investors couldn't make it even if they Diversify and believe High Return comes with High Risk.

This is not a new concept actually,

"Risk comes from not knowing what you're doing."  ~ Warren Buffett

"Volatility is NOT Risk." ~ David Dreman

This is not a debate on what the real meaning of Risk is.  Its a matter of how we should look at it so that we can do something about it.

If you believe in High Return High Risk, then when you enter into a potentially high return investment vehicle, you naturally accept that comes with high risk.  This psychological preparation puts you into a 'its ok to lose' state.  More than often people in this state will sit, wait and pray the worse wouldn't happen.  ( which you have just violated the 2 most fundamental flaw in NLP )

On the contrary if you believe Risk is something you don't know, then naturally you will try to find out more about this investment vehicle.  You may eventually pick the right vehicle or you find out how to deal with some of its limitation.  Either way, it puts you in a better position than the earlier scenario.

One of the greatest example of all time is that someone didn't think gambling is all that risky, as a result the whole school of technical analysis was introduced and is one of the hottest study one can get nowadays.

Gambling is risky, yes.  Avoiding it is temporary safe, yes.  By not knowing more about it, you risk getting into it without knowing it.  By thinking risk is when you don't know, you can learn why gambling is risky.  As a result you may come up with some new principals in life about gambling.  If you found out how to deal with this risk, then you would also have a set of solution dealing with 'this kind of risk'.  You may still NOT WANT TO get involve and this time, you can be very sure and understand why you do or do not do something.

"If you risk nothing, then you risk everything." ~ Geena Davis 

Low Risk High Return ?

Seems like still quite a number of people do not agree that Risk is dealing with something you don't know (read the post about risk here).

So I would like to repeat that yes while Low Risk Low Return and High Return High Risk are TRUE but if you think it that way, you may just settle for "whatever it is, it is !"

For example, you may think you are not a risk taker, therefore you will never get a high return !!

My 'additional' point made to above truth is that, you should still make effort to learn the next risk in your portfolio so that the more you know, the better you can manage that risk until it becomes insignificant compare to its potential return.

Personal Finance RISK - another Myth

A very common comment in Personal Finance is this ...

The Higher the Return,

The Higher the Risk !!

I agree with this if I am a general public.  I also like it if I am discussing this in a philosophical class.  But in practical life in Personal Finance, it doesn't help much.  It just tell me not to be greedy.  But it doesn't tell me what to do with my portfolio.  So the myth buster is as below ...

Generally higher return comes with higher risk,

For Those Who Don't Know ANYTHING !!

If you know exactly what you are getting into, has prepared for the worst and expecting the best from it, so ideally there is no risk at all.

For example,

standing expose in high place is dangerous,

especially if you are not used to it.

But high rise workers do that everyday,

they know very well what to do,

and what not to do.

They check all the safety cables,

before going up,

and look for secondary fall place,

before making the next step,

just in case they fall,

they have had enough compensation,

for their own or their loved ones.

Day in day out, they are used to it,

and they are not over confidence,

Its very risky for you,

Its not that risky for them.

Some may claims that the risk is the same to all, just that one has mitigated the risk and another not.  Well, again in practical, if you have already mitigated the risk, the risk is gone and there is no risk anymore - ideally.

Back into the high rise example, if you are an office worker and you think high rise is risky.  So you decided not to go to high rise building.  That is also one way to mitigate risk and there will be NO RISK AT ALL if you never go that place.

So the fundamental about risk is,

The more you learn and know about it,

the less risk it is to you personally !

So yes generally higher return higher risk but you are not a general public, you just need to know what you have to do for youself so that you can achieve higher return without the same high risk in your portfolio.  Thats why its called "Personal" Finance and not General Public Finance :)