Invest Your Way To Financial Independence

Invest your Money and Do it Wisely.

That's what we will focus on this section. In this time and age, many feel that greed is neither good nor bad. It just is. Or is it?

Too many cases can be quoted where people ruin themselves financially or lose their better judgement due to greed. Personally, I feel one should hold certain personal values and specific goals.

Have a solid guideline and criteria to evaluate any investments you want to make. Hold fast to your guidelines and you will less tempation of falling into greed and thus clouding your better judgement.

A side note here. Some people feel that one of the best ways to achieve financial independence is this. That is to have a game plan to invest in having muliple sources of income.

Ken Evoy's site provides lots of resources on achieving multiple sources of income too. An good strategy is to divide your investing into three broad categories.

1. The first category consists of very safe instruments like cash, bank deposits etc. These are generally very liquid and do not fluctuate in value. There is generally very little or no risk.

2. The second category carries a little bit more risk. These investment instruments are subject to market fluctuations but conversely may provide better returns. Mutual funds (or unit trusts) and bonds generally fall into this category. They may not be as liquid as instruments in the first category.

3. The final category are usually illiquid instruments and may include stocks and shares, physical properties and other types of "exotic" investments. The risks are much higher, and so are the possibility of better returns. There are no guarantees and the value of these investments depends very much on market conditions and sentiments.

Having listed the various categories of investments which by the way, are in no way exhaustive, how do we go about building our portfolio?

A simple guide will be to build your portfolio from the safest category before moving on to the next.

Bear in mind, though, there is no compulsion that everyone should own category 3 type of instruments. In fact, depending on your risk profile, many people should just build on category 1 & 2 instruments for their own portfolio.

By constantly investing category 2 instruments, it is also possible to build a comfortable nest egg.

Discipline counts here. The key to being successful financially is not only to have your investment generate good rates of returns.

It is also being disciplined enough to "compound" your earnings and channel them back to the nest egg to further build them. This means that you do not spend the profits. Build on your profits instead.

Discipline also means that you commit to the process regularly.

By the way, having the right discipline also frees you from unnecessary stress. Personal Managementis key here. If you do not want unnecessary heart-aches and stress, you need to be have a game-plan and the discipline to follow it through.

There are different schools of thoughts here. One school of thought says that you try to time the market and "go for broke" when the opportunity arises, for example, when the stock market begins to rise. When nothing seems to be happening, just put your money in safe and liquid instruments and do nothing. There is nothing wrong with this approach. Except perhaps it may not be appropriate for the majority of the working population who may not have the time and resources to study the market in-depth and is not in a position to "time" the market.

Another school of thought says that you invest regularly regardless of market conditions. This approach takes into consideration that one can never time the market and thus should always stay invested. These assumptions are also backed by the fact that those who follow this school of thought tend to fare better. This is what is known as the "dollar cost averaging" method to investing. Without going into specifics, it can be shown that with this method as long as the time horizon is long enough, the returns can be quite credible. This method will pick out both the highs and lows of the market over time. And since research also suggests that 80% of the market upturns occur in 5% of the trading days, it may be the wise thing to use "dollar-cost average" for investing.

Another advantage is that there is less stress on the part of the investor, since he is only to keep investing regularly over a period of time. This approach probably works for the majority of people.

An example will illustrate the viability of the "dollar-cost averaging" method.

For example, you decide to invest $1000 every month into a mutual fund for the next 11 months. Say the value of each unit of the fund starts at $10 and falls in value by $1 each month for five months. It then slowly rises in value by during the next 5 months until it reaches its original value of $10. The rate of return in this case will be an impressive 13.6%.

The breakdown will be as follow.

The annualised return will be about 13.6%.

A point to note is that if this system is adopted, it is important that it is a conscious decision. The system has be followed conscientiously for it to work. Thus emotions should not come into play here.

Although I have a personal preference for the dollar-cost averaging method, it is up to the individual to decide which system works best.