All,

I started this thread so that I can post my views on personal finance and let's others to post questions to me.

Dreamer

---

Added on July 16, 2007, 7:49 amLayered cake approach of investment

Imagine that you have a cake and there are multiple layers to that. For investment products, there are various level of risk versus return and you put money into each layer accordingly.

1) I do not consider emergency fund as investment. That is the minimum level of safety before you take any kind of risk.

2) Insurance is for risk management. For insurance products that provide return, it needs to tested against other product as for it risk adjusted return.

In the foundation, you have low risk, lower return product. In that category, you put most of your money. You should have low or close to zero risk of losing your money. Safety first. In the foundation, you have slow and steady growth.

On the upper layer, you put in less money. You have chance to lose money here but the return should be high enough that if you win, you win big.

The problem in Malaysia is we have SOME but not many choice in the investment products.

In USA, my base foundation is based on USA stock index fund, world stock index fund, USA Real Estate Fund, World Real estate fund, and USA bond fund. This is where I put most of my money. The bottom layer is designed to grow 9% on the average in the long run. It is tested against 60 years of historical data.

I do speculate and gamble on some stock. But, it is less than 5% of my money. I only buy stock that may provide 3 to 10 times return. For that risk, I prepare to lose 100% of my money in stock. I do not buy any stock that promise less than that. It is not worth my effort.

Dreamer


This post has been edited by dreamer101: Jul 16 2007, 07:49 AM

I've been reading many of your constructive threads/posts for sometime and I have to say that they are good.

I have bookmarked this and am certainly looking forward for some good stuffs from you.

Keep up the good work. Thanks

http://www.ricedelman.com/planning/default.asp

All,

One of author that I highly respected and where I learn the layered cake approach from.

Dreamer

It's good of u to share your knowledge on investment so may I suggest u start with teaching us how to go about investing in those funds u mentioned. Thanks.

You need to ask the FIRST QUESTION first. How do you know XYZ product is RIGHT for you?? You can lose MONEY by investing on the WRONG PRODUCT for you.

Not everything works for everybody.

For example, for people that deal with short term trading, they have to watch the stock closely. You may or may not be able to do that. Or, you have much better thing to do in life.

I am NOT trying to sell anything to you. I want people to take a strategic view of investing and construct their own LAYERED CAKE.

Dreamer

There is no such thing of a right rule for everybody. Each person is different in term of financial situation, willingness in risk exposure, knowledge, job commitment etc. Example if you are working as a pilot, you don't have time to monitor the market nor acceess market information in time, then UT or ETF might be (might be but not necessary since there are some stock that you almost can forget about it after you bought) better choice compared to invest your own.

May I ask on how people with little capital construct their Layered Cake, especially for those younger and just-started-working ones?

These people have little choice of investment and most likely can only concentrate on one kind of investment due to shortage of capital for diversified investment.

This post has been edited by kimhoong: Jul 16 2007, 12:20 PM

First of all, I agree with dreamer on the emergency fund and insurance. I believe one should take care of all his/her security matter before going after any investment. Assume 1 day you fall sick and lose your job, how are you going to survive the rest of your life ? The answer is your emergency fund and insurance will take care of you (and your family) in the worst possible scenarios.

Now on the investment part... Investing in USA... Let's try to make this a constructive post for everyone. I believe it's easier for us to see the big picture if we list down all the pros and cons for investing in USA comparing investing locally or emerging market.

Pros
1. Lower Cost for most UTs in USA (except for hedge fund... hedge funds dont really apply here since dreamer is going after conservative to moderate investment vehicles only)
2. Highly diversified portfolio

Cons
1. Barrier of Entry - How can one get started investing in USA ? Whats the minimum fund required ? How to get hold of the cheapest exchange rate around ? It raised a lot more concerns compared with investing locally. I do not have any experience investing in USA directly, perhaps dreamer can tell us more about it.
2. Forex Market - Its true that investing in a USA index can enjoy a more diversified portfolio. But does the risk adjusted return of investing in USA really bigger than the risk adjusted return investing in locally ? From what we have observed in the past 1 year+, USD has depreciated ~10%, and many experts believe that the USD is still going to depreciate even further. So, is it wiser to wait for the USD depreciates more before we enter the market ?
3. Economy Growth - USA is running at a <3% growth annually now, and they are having problem coping with the rising inflation rate. There have been many speculations on USA will be getting into recession soon. If some day, the inflation rate > growth rate happens, it would mean they will experience a negative real growth. With such economy prospects, is it worth to invest in USA in long term ? You can argue that its still possible to make money from USA as many of its firms is making enormous gain from foreign market. But.... wouldn't it be wiser you invest directly into the foreign market ie the emerging market ?
4. Almost always perform poorer than the index - An index fund will almost always perform poorer than a market fund because of its charges. Not by much, by 0.x% annually. For people who can afford to take more risk and wish to make above market return, what would you suggest ?
5. Worst possible scenario - If you have seen the historical past of USA market in their recession, they struggled A LOT more than we did with our market. So now both M'sian and USA market are at its peak. Someday they will fall, if both will be going through the deep recession, which economy will be suffering more ? How long would it take for USA market to recover compare with Msian market ? Given the current USA economy condition, it certainly doesn't look good if recession were to hit the country.

Investment method
I'm wondering what kind of investing method do you use to take full advantage of this highly diversified USA market ? A dollar cost averaging method ? A lump sum investment ? Purely passive investment or changing your equity exposure from time to time ? Different methods certainly would bring different outcomes.

I have a question on how did you get the 9% return over a USA portfolio ? Is it a raw gain or net gain ? Have you deducted all the expenses incured in forex, transaction fee etc ?

I personally believe in long run, investing in emerging market like china, hk , taiwan, s.korea, sg, msia would provide a better return (while it's possible to expose to slightly higher risk). The key is the investment method you pursue to get your return from these markets.

It's just the little thing I can think of atm, feel free to update the pros and cons list above.

This post has been edited by ejleemy: Jul 16 2007, 02:04 PM

I'd been thinking for years to start some investment but I never get chance to study due to my heavy work load! (well, can be considered as I don't have the patient to read on those stuff! )

Till now... the spare cash still hanging there with bank!!!

dont be rush planning your investment, lots of people wants to get rich quick and they gamble everything in one kind of investment, then the UT or mutual funds will starts going down..

i agree with dreamer's first post's point no 1 and 2.

dreamer, you are a senior here. i agree with your investing methodology but i want to know how to get it done practically. i do know that everyone has different taste in investing, but i want to know your "taste". i want to know how to invest in the US, which fund you invest, how you file your tax returns, which local stocks you choose and why if you can guide me step by step and if i can take all the risks, i would most probably follow your footsteps.

as an investor, i take calculated risk and always go for best return for money.

as for yygal, planning to invest is good. have been planning to invest for years but never done so due to work? 365x2 (years, plural) = 700days, not one day for investment study? well, it;s your lucky forum. there are many people who are investing savy here, some are even agents. call them out for a talk, you don;t have to buy. bring along your friends for your safety and sharing information. the more you procrastinate, the more you tend to lose out on the advantage of compounded interest.

---

Added on July 16, 2007, 4:31 pmalso you guys might be interested to visit this URL page.

about US inflation rate and also tells that year-to-date April, the inflation is running 4.8% to 7.4% in US. there's also inflation risks apart from the risks that ejleemy mentioned.

This post has been edited by 1stLaksamana: Jul 16 2007, 04:33 PM

If you buy good solid stock and the lot size is only 100, you can start with little money.

ejleemy,

You do not understand the basic of asset allocation model. We are using an A/C in USA. We are investing on asset, stock, bond all over the world. It is NOT in USA ONLY.

Do you understand that in most cases, you can use asset classes to manage your risk? For example, in recession when the USA stock market clashes, the bond market is doing very well. By having investment in both, you diversified and cancel out each other. Due to re-balancing, you always buy low and sell high.

For example, to protect against US currency devaluation, I invest on international stock index and international REAL ESTATE. So, I diversified and manage the risk. You can do this as an individual investor in USA easily. I am my own fund manager. I can hedge my risk. This is call the science of investing.

Dreamer

---

Added on July 16, 2007, 6:58 pm1stLaksamana,

For every kind of risk, there are SOME asset class that gain from that. So, you manage your risk by spreading your investing out to enough asset classes that you hedge your risk.

What makes you think inflation is a problem?? Stock in USA always return higher than inflation in the long run. It is NOT a problem.

Dreamer

This post has been edited by dreamer101: Jul 16 2007, 06:58 PM

Dreamer,

Actually I don't quite understand something here. Many said that if the stock market crashed, switch to bond. When the market really crashes, can we really switch in time to bond? This bond thingy, is it limitless? I mean can it be fully bought? If we all rush to buy bond when the stock market crashes, can there be enough bond for all of us to buy?

Cheers,
max

maxwoo,

<<Many said that if the stock market crashed, switch to bond.>>

That is why most people LOSE MONEY. That is the worst time to switch to bond. You sell stock (LOW) and buy bond (HIGH). When you buy high and sell low, you always LOSE MONEY.

In asset allocation model, you always have investment in both STOCK and BOND. Let's use a simple example of 50% STOCK and 50% BOND.

When the STOCK MARKET crashes, BOND market went up. So, now, you have 70% BOND and 30% STOCK. You do re-balancing. You sell enough BOND (HIGH) to buy STOCK (LOW) to make sure that you have 50% STOCK and 50% BOND again. Your re-balancing make sure that you SELL HIGH and BUY LOW. And, you only do this once every 12 to 18 months. It is a mechanical system that take emotion out of equation. People won Nobel price for proving this.

Ditto, you can have investment in USA and outside the world and so on to balance thing out. In fact, you want asset that DOES NOT correlate with each other as much as possible. Aka, they do not move and react to each other.

In this kind of system, you do not switch fund except maybe once a year for re-balancing.

The goal here is TO MAKE MONEY under all circumstances. Take luck out of equation. It is a science and NOT an art.

Dreamer

This post has been edited by dreamer101: Jul 16 2007, 08:32 PM

Sorry for my noob question, so usually we buy the 50% stock and 50% ourselve or there is some kind of fund that help us do the mentioned task.

so buy high sell low?

sorry but you have yet to reply to my questions. if you can just teach me exactly like what you do, i'd be grateful.

mainly this part "i want to know your "taste". i want to know how to invest in the US, which fund you invest, how you file your tax returns, which local stocks you choose and why"

Oops!! I made a mistake. It should be you always lose money when you BUY HIGH and SELL LOW.

https://flagship.vanguard.com/VGApp/hnw/fun...&FundIntExt=INT

VSMGX

In USA, you can buy one fund that consist of 4 funds and they will do the re-balancing for you automatically.

Dreamer

---

Added on July 16, 2007, 8:36 pmBond is equal to fixed income. So, you pick the best fixed income investment product that is available to you. Fixed income could be FD and other stuff.

In USA, you can buy a fund that has both stock fund and bond fund. The fund itself will do all the work for you. I do not believe there is any good UT on this for Malaysia since we have NO REAL INDEX FUND.

Dreamer


This post has been edited by dreamer101: Jul 16 2007, 08:36 PM

Thx for sharing, are we able to emulate this model locally?

Dreamer,

I tried looking at the fund you mentioned but how can I invest in that particular fund. I can't find any useful link for non-US investors. Kindly advice.

max

Hi Dreamer, after reading this article, I am very interested in your views and opinions.

I am 18 this year and I was thinking of investing. Stock market is too early for me right?

I do have 2 funds in UT, under my mom's name. I just put the minimum amount only, just to see what I could get.

Anyway, any suggestions for people aged like me?

Kindly appreciate if you have advice.