Invest wisely – Your savings can be eroded over time by inflation.

My dad , a wise man in the area of life always advice me on the right way of living. His principles and logic often guide me along. In a way of other, he has been a good man to the family. When it comes to investing, dad always have a logic , and it is not only a logic he has but one which is being shared among a lot of Singaporeans. Earning money is hard back in Singapore. As a taxi driver, he doesn’t take home much. Just like any other Singaporeans that work hard, the most important thing that they want is not to lose their hard earn money.

The news has been focusing on how much the stock crash, how bad investment ruins lives of people. How inflation rise were also mentioned in the news but there were nothing taught on how to beat inflation. Keeping money in the bank with the tiny bit of interest isn’t gonna keep your money safe. Literately it does, because it doesn’t decrease in digits but it decreases in value. Something that is not shown or realised by the people who hold their money in the bank. Walking on the streets, you can hear people complaining about how much prices raises this days and all you hear is, “10 years ago, I can buy a plate of noodles for just $1.50″

That is inflation.

Just like the above comic that is originated from im$avvy website, people know too little about investing and having the fear of it. So how do you actually get informations on investing. If you really know nothing about investing, it is not wise for you to step into the stock market. It would be better for you to purchase a fund. A fund is an instrument that is “build” by high risk and low risk investment instruments. However, why is it that on a short term, people always say they are not earning money through funds? Depending on what type of investment vehicles you are looking at. If you decides to buy a fund, make sure you buy it when the market is not at it’s peak. A simple example would be, again using an Apple. 10 Apples are selling at 5 dollars at a point of time, suddenly due to high demand of apples, it roses to 20 dollars for 10 apples. You decided that you want to buy an apple fund. So you place 20 dollars for 10 Apples. The Apple then raises to $25 for 10 and you are making a clean profit of $5 . However , you need to know that there are bid and ask price. Meaning to say, the buying price of an Apple is not the same as the selling price of the apple at the same point of time. Most funds allows you to do a fund switch for free, for example, if you decide you want to switch to oranges , you will be able to sell all the apples at the current “buying” price and then buy the oranges at the current “buying” price. However if you decide to sell the apples and take the money, you will have to sell the apples at the “selling” price.

So lets say you own 10 Apples at $25 for now. So you are making a “paper gain” of $25 . Profits are considered paper gains before you sell it. Paper gains refers to gains that is only reflected on paper. Only until you sell off your apples, you will get a realised profit. That is real profit.

Lets put the bid and ask price aside first and asume that the “buying and selling” price of the apples are the same. So if I am to sell the 10 apples for $25 , I would have gain $5 because I bought them at $20. However I decide I want to hold on to my apples . 2 weeks later, the apples dropped in price to 10 apples for $15 dollars. I would be in the position of $5 loss. This occurs when you buy at market peaks (when apples are at their most expensive price) Then the price drops back to reasonable price. You would be holding a lost of $5 for a long time.

The above examples is just for simple reference. A fund is not a single product meaning to say, it does not consist of just one type of apples. There are different funds around the market. Eg there could be funds consisting of apples, oranges , mangoes packaged into 1 fund. There could be a fund of different kind of apples. Example, a REIT fund consist of different REITs .

Because of such things happening, people fear to lose their money and store them in banks. Banks on the other hand gives you low interest and it’s “risk free” meaning you won’t lose the capital. However when inflation kicks in, the price of things increases and therefore your money value drops. Inflation is a part of the reason of why market always goes up in long term. When a financial advisor tries to focus on “markets always goes up in a long term” and shows you a chart stating that no matter how violatile the market is, long term you will earn money. Do take note that it is true that markets will go up in long term but also realise that in long term , is the increment of your investment beating inflation? Don’t just listen. Always think and ask questions.

Another way to invest is by Cost Dollar Averaging. Cost Dollar Averaging is a method widely promoted by Financial Advisors. It involves buying units at different prices. For example again, using apples. You have a $10 to start of with and you are investing $10 a month. Financial advisors like to paint you a picture where you are buying in at the top of the market, so month number 1, you can buy 10 apples for $1 each. Month number 2, apples are now $2, so you can buy 5 apples. Month number 3 , apples are now $4, a great jump! so you can only buy 2.5 apples.

So in average, you have paid, $30. now as on month number 3 (with market going up) you are owning 10+5+2.5 = 17.5 apples. So the average cost per apple is 1.71 . At month number 3, apples are worth $4 each . Remember? that’s how you get 2.5 out of $10. So at this point of time, your portfolio is earning money! take 17.5 apples x current apple price = $70 . If you were to sell all of your apples now (again not taking in bid and ask price different) you would have earn a clean profit of $70-$30 (invested money) = $40. Wow. Impressive ! you would say and you decided, ok I will buy the fund from you after hearing this. But wait.

Let the market continue and let me pull you back to reality.

Lets continue. Month number 4, the price of apples shot up! and hit $10 for 1 , the peak of the market! At this point, what you should have done is to sell of your units and put them into a money market fund (switching funds is free) however you didn’t know so you continue with your fund arrangement, you buy apples for $10 for 1 for 5 months. so you spent another $50 for 5 apples.

In total right now, you spent a total of $30 + $50 = $80 on 17.5+5 = 22.5 apples.

Lets calculate again. Market is at top, I should be earning money right?

The cost of an apple at this point of time is $10 . own 22.5 apples so your apples is worth $225 dollar. Woohoo! Yeah I earn money. I spent $80 and I earn $225 dollars so my profit is $145 dollars!  If you realise , you did not make any profit on the 5 apples you bought at $10. The extra $5 gain was from the previous apples you owned, 17.5 apples. it raises from $4 an apple to $10 and apple so the profit was $145 instead of the $40 which we calculated when apples were at $4. ((17.5 x $4) – $30) = $40 ((17.5 x $10) – $30) = $145  . So? you ask.

The possibility of market going down is more as the apples has hit it’s high.

So it deceases to $8. So how much did you gain at this point of time?

((22.5 x $8) – $80) = $100 . Your earnings just dropped from $145 to $100. This was greatly due to the 5 apples you bought at $10 so you are losing $2 each for the 5 apples so you actually lost $10 in total for the 5 apples. However, there is still profit because of apples you bought previously at a price lower than $8.

As this is a fund, you continue to buy the apple at $8 with $10 a month so you bought 1.25 apples. Month 6 , you own 23.75 apples with $90

Month 7 , Apple price $5 , Buy with $10,  Total apples 23.75+2 = 25.75 , invested $100

Month 8, Apple price $5 , Buy with $10 , Total apples 23.75 + 2 = 25.75 invested $110

So in summary till date, you are earning 23.75 x $5 = $118.75 – $100 = $18.75

As you can see, the amount was greatly reduced due to the $10 of apples you bought.

However CDA, Cost Dollar Averaging is buying the market at any time, therefore, holding on to long term, your portfolio value will raise.

If ever it goes back to $10 (which it will somehow usually) , you would be earning (not taking into buying in again at this point of time)

$10 x 23.75 apples = $237.50 – $100 = 137.50 profit.

What you need to know is usually for CDA , which most ILP (investment link policy uses) There is a rate, meaning to say, for first year , maybe only 20% of your money invested is really used to buy units , another 80% is charged as admin fees. The percentage adjust as times goes by, 2nd year could be 30% , followed by 50% then maybe at the 6th year 100%. Depending on different products and different issuers.

You need to know that is the main reason why you are losing money in the start and why it takes such a long time to break even.

Some people break even fast, some people break even slow. The most perfect way is buying when the market is high at first year, 20%. High the percentage when it is high, the less you will lose when it drops as you only own 20%. When it changes to 110%, it would be best when it hit rock bottom, so every cent you invest + extras will be buying in when “apples” are at it’s cheapest and losing the minimum as your purchases at less tha 100% invested is at high.

Well, you can’t time the market, so over all, we all don’t break even that fast.

Well I hope the above doesn’t scare you off and make you place your money into the bank again. There are a lot of different kind of investment vehicles you can explore. Like what warren buffett always says, Risk comes from not knowing what you are doing.