Financial Freedom SG

A colleague asked me today about what a Ponzi scheme is after looking at the story of Bernie Madoff being jailed 150 years.

Basically, it is like a pyramid scheme where the people who invest early and sell off, manage to make good returns on their initial investments because the 'returns' is taken from the money of those who invest later, but those who invest later or sell off near the bottom lose everything. That is, there isn't any investment, its a fraud.

Investment is pretty contradictory- it can be very simple, but people make it complex.

Like the petals of a flower, investing needs several strands to come together before it can work:

1. Risk and Returns- But like a flower, it comes with thorns which are the risks that comes with every investment. High risks comes with high returns and if there is anything at all that promises low risk with high returns, run like hell.
   
   
2. Save before Investing- If you buy shares or funds before you have a sum of money to tide you over several months of your spending/salary, you are not investing, you are speculating. Reason being, if you suddenly need money and have no savings, what do you think you are going to do with all your shares?
   
   
3. Time not Timing- How much you ultimately make is not determined by your instincts in buying low and selling high. No one can do that. How long you can stay invested is more important.
   
   
4. Market then Company- Anyone can tell you that you should have bought Microsoft or Google or Berkshire Hathaway after they had risen by 100% or more. Before the event happened, you wouldn't know who to trust, whether they are trustworthy enough. Remember Enron, or Madoff? It is more important to buy the whole market, so you get a few pieces of Microsoft, Google along with a little of those that don't do so well. Then if you are feeling lucky, take a bit of your money and punt it on some companies and hope that they aren't Enron wannabe.
   
   
5. Diversification is Essential- After you bought 10k of S&P 500, or Russell 1000, look global to buy markets or companies from other regions and countries, this will help you spread your risk. United States is in trouble now, but China is growing and some of their companies are doing relatively alright. Diversification is no longer an option.
   
   
6. Ignore any Slump- At one time, my wife was giving me the look. You know, the 'Do you know what the hell you are doing' kinda of look. Our investments were down 60%, she was moaning about the paper losses and asking if we should sell, and here I was, asking her to buy some more. Today, if I sold off two of the stocks I bought then, I would have made more than what I had made in 6 years. Smile and smell the flowers.
   
   
7. History is Bunk- This is rich coming from an ex-history teacher, but it is true for stocks and funds. Past performance is NEVER an indicator of future performance. Forget the past, someone went to analyze the performance of the top 10 funds and how they did the next few quarters. Guess what? NONE made it back again.
   
   
8. Index over Mutual- The financial advisors themselves invest using index funds and passive investing while asking YOU to buy the mutual fund that they themselves don't buy. Why? If you have time, read this article about stock pickers, it will be worth your time.
   
   
9. Dollar Cost Averaging-I do this to force myself to invest a little every month, sometimes, I forget about my investments and I don't look at the stock prices every day because I know that active investing means that you spend a lot of money paying your brokers for the commission of trading in and out. I rather buy a bit every time, and when I have bonus or spare money accumulated, I look for opportunities to buy into the market.
   

I hope that these little petals can help you start on your road to financial freedom. Have an interesting journey ahead!