On Network Marketing

I Will Teach You To Be Rich by Ramit Sethi is fast becoming my favorite finance blog. In his post I Hate Indian Network Marketers So Much, Ramit lays it on network marketing. His analysis is right on target and explains why I find this “industry” as repulsive as I do.

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Money quotes:

If you spend more time recruiting people to do your job than you do selling products—and you’re supposedly in a “sales organization,” you may be in a scam.

If you do your research and discover an industry filled with fraud and broken promises—one in which you can reasonably expect to not only be swindled, but to then swindle others—you may want to reconsider your choice.

[Read the article]

Playing with Money

[Note from the author: Yeah, it’s been a while since I last posted but I certainly haven’t stopped investing. Hopefully, future posts will not come several months apart :D]

Despite my misgivings about most of Robert Kiyosaki’s opinions, there are some useful concepts he is able to explain in an approachable manner. In one of the audio books I listened to, he used the terms “survival money”, “real money”, and “play money” to categorize the kinds of investments he makes. Survival Money is money you need (or may need) for your expenses – these should be held in very stable investments such as real estate or bonds or just plain bank accounts. Real Money is where most of your finances go and usually placed in well-understood fast earning investments. Play Money is money you can afford to lose and can be placed in risky bets such as IPOs, speculative stocks, or new investments you want to try out.pse21.jpg

Early last year, I allocated some play money to try out direct stock investments. Before then, all of my investments have been in mutual funds, which I never have to actively manage myself. Suffice to say that it has so far been a roller coaster*. My positions have been going up and down throughout the year and now mostly being down due to the effects of the U.S. recession fears.

I’m still deciding whether to continue direct stock investments – now armed with a better sense of the amount of time and effort it would require from me. It was important that I made a deliberate decision to allocate play money – money that I am comfortable losing – to this investment. Otherwise, a significant loss would send me into panic and I would not just have sold off my positions in a terrible time (realizing paper losses) but also prevent me from logically assessing a perfectly legitimate form of investment.

I think all investors with different circumstances and tolerance for risk can benefit from segregating “survival money” from “real money” from “play money”. It’s just that for different investors, the same investment can fall under different categories. For example, stock investing falls under play money for me, while for many, it may be a perfectly stable investment and fall under real money. And if I continue to spend time and effort in stock investing, it may eventually fall under real money for me and end up with a bigger share of my total investments.

* Yeah, equity funds have also been in a roller coaster last year, but individual stocks even more so, naturally.

When to start?

I came across this nugget from I Will Teach You To Be Rich blog:

It’s so easy to read this site, watch CNBC, buy the Wall Street Journal every day, etc. After a while, you know what you should be doing. But really, the only way to get rich is to start doing it. Whether it’s starting a budget, or buying your first stock, or even just opening the right bank account, that’s the way to do it. Reading and reading and reading with no action won’t accomplish anything.

power_button-2.jpgI totally agree with this statement. Sometimes we get stuck in a state of paralysis by analysis and before we know it, years have passed and we haven’t done a thing. I’m certainly a big believer in researching investments before jumping in. But at some point you just have to take the plunge and see where it goes from there.

Seasoned investors always advise new investors to start with a strategy first before picking any investment products. But the thing is, I believe most people – including many of these very veterans – didn’t start with strategy first. They invested, then learned, and only later developed strategies. Besides, I think it’s pretty hard to craft a strategy if you haven’t gotten a feel for investing yet.

On the other hand, I wouldn’t want to invest my whole life savings on an investment I’ve only just heard about. I believe the key is to move slowly at first then pick up speed as you gain more understanding.

Learn a little. Invest a little. Repeat.

Blog update (May 27, 2007)

It’s been a while since I last blogged – more than a month, actually. Work related stuff is keeping me very busy these days. I’m barely even able to keep up with Salve’s blog whereas I used to read every article and every comment almost as soon as they show up :P. I do have several posts in the pipeline and plan to finish and publish them in the next few weeks. Hopefully I’ll be able to update this blog at least twice a month going forward.

On Financial Freedom

simple-dollar.jpgThe Simple Dollar is one of my favorite finance blogs. In fact, this blog’s name is inspired by it. Recently, the author made a post about how financial freedom is changing his life.

For a lot of people, financial freedom means not having to work – where your passive income can sustain your living. This is definitely a great achievement and a nice place to be in. But to me, financial freedom is not a binary thing – where either you have it or you don’t. It is a gradual shift and as you move forward, you get different levels of freedom.

One of the stages is getting out of serious debt. The Simple Dollar has a series of thought-provoking posts about this. Thankfully, I have never been in a position of debt. I imagine that to be a really stressful state to be in.

Another stage, which I’m currently in, is having a financial safety net in place. Having some money in the bank or maybe even in investments to fall back on in case something goes wrong. I used to have only 1 month worth of salary stashed in the bank in case I lose my job. I figured its enough to sustain me for 2 months at reduced spending as I get my next job. Now, my current financial assets can cover my current level of spending for 2 ½ years. That’s huge for me.

I still have to work to sustain myself. But without this safety net, I’d feel much more compelled to go for that new company offering the highest salaries or to chase the dollars abroad. What this means for me is that I can choose a job and a career which truly excites and challenges me, instead of constantly worrying about my salary.

Getting Insurance

contract-manufacturer2.jpgEver since I entered the workforce, insurance agents have been selling me their products. They have been showing me this hybrid life insurance/investment policies. But whenever I look at the numbers, it just didn’t make sense to me. The annual payments are hefty and the returns are small. You’ll only hit paydirt when you die! But then what good is that for? They just seemed like bad use for my money.

So for the past few years now, whenever someone would suggest insurance to me, I’d just shrug it off.

But a few weeks ago – during holy week, actually – I was browsing around the web and came upon the topic of insurance. I started reading about it. And I finally got it. Insurance looks like a bad investment because, well, its not an investment … its insurance!

You see, when I used to think of financial risks, I ask the following questions:

What are the risks in my investment portfolio? What happens when the market goes down? How should I balance my money between equities and bonds? How much cash should I hold? Etc, etc.

But this is a classic case of not seeing the forest from the trees. I was missing the bigger picture. I should be asking the broader question of:

What are the biggest risks to my finances?

And this is where it hit me. If my investments for some reason crashes tomorrow to zero value, that would be terrible. Absolutely dreadful. But you know what? I’ll be just fine. It will have no impact whatsoever on my lifestyle now and in the near future. I am actively employed, with good career prospects – this is where I derive my daily comforts. So when I think about it, the answer to this question is pretty obvious. The absolute biggest risk to my finances right now is, if for some reason, I find myself unable or hampered in my ability to work!

After this revelation, it just made a lot of sense to me to use insurance. Use insurance to give me a cushion if ever something like that would happen. In fact, after it hit me, it felt so urgent, like I had to get it that very minute. I wanted to contact my agent asap. Fortunately, it was a holiday and so I just did my research first. Finally, after two weeks, I bought myself a healthy dose of accident and health insurance.

p.s. Now, even life insurance makes sense to me. I wouldn’t buy it yet, though, because it does not fit my circumstances yet.

Trackback surprise

Just awhile ago, I checked out the Money Smarts blog to find that i had a trackback in the “The dangers of chasing returns” post after I linked to it in my last post. Yikes! I didn’t know that WordPress automatically creates trackbacks like this. I definitely wouldn’t want to create trackbacks all over the blogosphere without me explicitly doing so.

After some digging, I found that this can be turned off by unchecking “Attempt to notify any Weblogs linked to from the article” under the Options->Discussions tab. Source

Chasing returns and protecting my money from myself

(This is the last of a series of posts about the investments I made last year. The previous articles are here, here, and here.)

In a previous post, I confessed to not knowing what I’m doing when I invested in my very first VUL. But guess what, I made another VUL investment in the later half of last year and it was in Philamlife’s AIG Money Tree. This time, though, there was a specific reason why I chose to invest there and it was because of the impressive historical performance of their dollar investment. What’s funny is that I don’t remember exactly the annual returns that I saw then – but I remember that they were pretty good.

Similar to Sunlife’s VUL, you can choose to allocate your total investment between several funds: Philamlife Dollar Bond Fund and Philamlife Global Bond Fund in this case*. These funds are not be confused with the PAMI funds – one of which is named Philam Dollar Bond Fund (note that this one doesn’t have “-life” at the end of “Philam”). According to my agent, these are also the funds where Philamlife’s insurance business invests some of its money. I don’t know whether this is a good thing or bad thing though 😀chase.jpg

Did I know what I was doing this time around? Well, not really, no. I took it again because (1) I still had a significant amount of dollars in the bank and (2) the returns looked really good. In fact, I think what I just did is what some people call chasing returns.

My returns so far are looking pretty good though. In the 6 months since I bought it, I’ve gained 7.08% – a few fractions short of the 1 year return I got with PAMI’s dollar bond fund (7.59%). But I’ll probably have to do a lot more research in VULs before I place more money in them.

A useful aspect of these VULs, though, is their long-term maturity periods. Long-term maturities are a negative in that my money is less liquid – I take a hefty charge if I take it out early. It’s positive in the sense that it protects my money from myself. Since I’m keenly aware of the impact when I take it out early, I’m less likely to withdraw it to spend on a frivolous toy. As long as I don’t tie up money that I might need in the short term, it provides a useful negative reinforcement for me to save my money for the future.

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* There’s another one to be released – Philamlife Global Equity Fund – but it’s not yet available up til now.