What is the most excellent way to initiate an investment?
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Call me Sam, 22 years old and currently work in a BPO company. I earn US$2,500 a month and hardly spend this money since I am single and live with my folks. My problem is that I always find my wallet empty at the end of the month inspite of having more than what I need. I’m wondering what is the most excellent way to initiate an investment.
In the last paragraphs of this posting, I share with Sam some financial tools he may want to reflect on. However, the perspective of that short version begins from another question.
Have you heard of these names? Jerome Kerviel, Charles Keating Jr. and John Rusnak?
I’m sure you never heard of their names.
These people have been connected to celebrated financial turmoil much in the same way that we have heard of the name Nick Leeson is a French trader who has been charged in the January 2008 Société Générale trading loss incident, resulting in losses valued at approximately €4.9 billion. Keating was the ringleader of the infamous Keating 5 ethical scandal which cost US tax payers $160 billion. Rusnak was sentenced to 7 1/2 years in prison for hiding US$691 million in losses at the bank, after bad bets snowballed in one of the largest ever cases of bank fraud.
The numbers are astronomical and not “average” by any stretch of imagination. Beyond the pure accounting of the dollars and cents lie either the saving of individuals who now find that their institution has closed or other stakeholders who must write off the losses against their capital holdings or of the general public who must, quietly and implicitly, bear the burden of a national bailout with future tax payments.Investors need to be aware of the risks in different investment options and to know more about financial institutions. Investors are not — should not — be passive players in the market; it is our saving, our capital, if not our future tax burden, that is at stake.
The question is: How?
This is the question before Sam. People will advise him on how to make sure that his US$2,500 a month is properly allocated into productive use. Some prefer rules, i.e. x-percent to pay yourself, y-percent for this need and z-percent on others. Some prefer a more flexible allocation which includes identifying — and doing away with — all the overlooked expenses that tie him down.
At the end of the day, given a fixed amount of monthly income, Sam needs to set aside a targeted amount of regular saving. Obviously, without some saving, the question of investment is common sense.
Saving without a clear idea of where that saving will go often does not turn people into ideal savers. Having funds laying idle somewhere is tempting. It is so much more fun to spend than to save, so I do not gamble on willpower too much.
Sam simply needs a goal. After that comes the hard part. Admonishing investors to take due-diligence seriously is easy enough to convey. Making it happen is completely a different problem.
When we wonder about a bank going belly up, are there really tell-tale signs to watch out for? If a would-be investor in Texas is interested in mutual funds, will he have to go to New York to find out about the different funds? When we ask our financial agents to conduct “suitability tests” on the prospective investor, how do we know if these tests were properly conducted? If the agent says they were done accurately but the investor says — after taking a loss — that he didn’t understand the subtleties and signed under
implicit duress, with whom shall we side in the event of remedial actions?
At the heart of the issue is financial knowledge and what drives that is information. A lot of would be investors — existing and would-be ones like Sam — do not have access to knowledge on all the options available. Since money is relatively firm and the complexities of the financial market can be threatening, liquidity will be a primary anxiety. But in this situation, keeping tabs on market changes is important. Unfortunately, access to these information remain uneven.
Going back to Sam, it is important to first get a feel of what it is like to invest before you take on more challenging product lines.
A useful place to start will be Treasury Bills simply because they are a short-term placement and are guaranteed by the government (theoretically no possibility of default). You will have to go through a broker of your choice who can place the order for you. He should tell you what variants are out in the market.
Basic bank products provide another option. Time deposits, for example, are also short-term placements. If the bank, for some reason, is closed before your deposit comes due, you may recover up to the limit provided by most government regulatory laws.
But don’t expect to get rich fast from Treasury Bills or time deposits. The idea is for you to get into the habit of setting aside a part of your $2,500 a month so that it can fund your desired initial investments. Once you get the hang of it and better understand the nuances (for example, the tax laws or the requirements for 3rd-party custodians or working through brokers) of market operations, then you can start exploring other product lines and longer-term instruments.
The fact that you are asking is a very good sign. But for the question to have any real value, you will have to act on it.
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2 Responses to “What is the most excellent way to initiate an investment?”
Treasury Bills are safe and assures you of a return. But the ROI is not enough and if you welcome risk, you may invest into mutual funds which USUALLY guarantees higher returns in the long run.
By
Robert (Who am I?) on Jul 2, 2008
what a “great article”
By
Almin (Who am I?) on Jul 7, 2008