How to diversify your resources among various resources – Part 1

So far we have considered what asset allocation is and why it is important to diversify your assets. In this post I will break down asset allocation into two parts. First, we will address the general principles of asset allocation (just a quick review). Then I will show you how you can apply these principles to your specific situation.

In thinking about asset allocation in general, two questions pop up. First, among what kinds of investments should I be allocating my resources?Well, if you read the ads you would think there were hundreds of kinds of investment vehicles – all of them tailored ‘just for you’.

The fact is, you can easily boil down all investment into only six categories:

• Cash and cash equivalent, such as money-market funds, treasury bills, current and savings account and short term certificates of deposit.
• Fixed-income vehicles, a grouped that includes tax-exempt bonds, corporate bonds, mortgages, and long-term certificates of deposit
  
• Equities, including both domestic and international stocks
  
• Real estate• Natural resources, including oil and gas
• Tangibles, such as gold and silver

Obviously there is a wide variation within these categories. Utility stocks / debentures, for instance, may behave at times like fixed income vehicles, because they yield such a steady rate of return. And some short-term, fixed – income vehicles may behave like cash. You must take these variations into account when you are ready to adopt specific investment strategies.

What to allocate

The second question that pops up: what resources should I be allocating among these six investment categories? There are some assets that you definitely want to exclude from your investment portfolio – your personal assets – and some that you definitely want to include – your investment assets.

The exclusions?

A cash reserve is a sure one. You should set aside some funds for emergencies in a secure, very liquid investment vehicle that does not fluctuate in market value. Examples include saving and current accounts.How much should you set aside? That depends. Many financial advisors suggest two or six months’ living expenses. But that advice does not apply to everyone.

You may, for example, be employed by a small company in a volatile industry. If that’s the case, you are more likely to face an extended period of unemployment than your neighbour who works for an established company in a secure industry. Or access to short –term credit such as credit cards may reduce your need fro cash on hand. However how much you eventually decide belongs in you emergency funds and should be excluded from founds you intend to invest.

What other assets to include?

You may want to consider as investment assets some items that you don’t ordinarily think of in this way. Among them:

• Insurance policy cash values
• IRA OR Keoghs (USA) SSNIT contributions (Ghana)
  
• Company – sponsored 401 K (USA) Provident fund (Ghana) and other savings plans
• Other Company defined – benefit plans

You should include these assets in you diversification plan because they are resource on which you will rely in the future and because they may be affected by market forces between now and the time you are ready to use them.

In my next post I will continue with this article and will show the diversification base case.

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Investing 101: What Is Investing - Part 2

Investing (n-vsting) The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. It's actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do.

There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it. You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere.

Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which i'll discuss in a later post.

The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand.

What Investing Is Not
Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping that things will turn out well.

Why Bother Investing?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle. Whether you live in Ghana, the U.S., Canada, the UK or pretty much any other country in the world, governments are tightening their belts.

Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. There is much debate over how safe our old-age pension programs will be over the next 20, 30 and 50 years. But why leave it to chance? By planning ahead you can ensure financial stability during your retirement. Now that you have a general idea of what investing is and why you should do it, it's time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest.



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Investing 101: Introduction - Part 1

Have you ever wondered how the rich got their wealth and then kept it growing? Do you dream of retiring early (or of being able to retire at all)? Do you know that you should invest, but don't know where to start?

If you answered "yes" to any of the above questions, you've come to the right place. In this tutorial we will cover the practice of investing from the ground up. The world of finance can be extremely intimidating, but we firmly believe that the stock market and greater financial world won't seem so complicated once you learn some of the lingo and major concepts.

We should emphasize, however, that investing isn't a get-rich-quick scheme. Taking control of your personal finances will take work, and, yes, there will be a learning curve. But the rewards will far outweigh the required effort. Contrary to popular belief, you don't have to allow banks, bosses or investment professionals to push your money in directions that you don't understand. After all, no one is in a better position than you are to know what is best for you and your money.


Regardless of your personality type, lifestyle or interests, this tutorial will help you to understand what investing is, what it means and how time earns money through compounding. But it doesn't stop there. This tutorial will also teach you about the building blocks of the investing world and the markets, give you some insight into techniques and strategies and help you think about which investing strategies suit you best. So do yourself a lifelong favor and keep reading. Each day,over the next seven days, i will be writing a series of articles on the following:

1) Investing 101: What Is Investing?
2) Investing 101: The Concept Of Compounding
3) Investing 101: Knowing Yourself
4) Investing 101: Preparing For Contradictions
5) Investing 101: Types Of Investments
6) Investing 101: Portfolios And Diversification
7) Investing 101: Conclusion



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