Wednesday, September 02, 2015

How to seek financial knowledge ?

Budget Babe was the first blogger to respond to the POSB advertisement which exhorts Millennials to surrender their financial futures to financial adviser.

You can find the posting here.

I'm going to post the next logical step which would take the reader towards building a basic foundation in personal finance.

Here are the bare basics before you even start on reading a financial book :

a) You run your life like a business.

A good way of framing your financial life is that you are running a business regardless of what kind of vocation you are in. Your salary is a result of you selling your time to an employer. The food, transport and luxury watches you buy for yourself are expenses. Everything that costs money is an expense : this includes your internet connection bills and management fees of unit trusts. The only thing of true value is what remains after your deduct your expenses every month.

This constitute your savings and investments.

b) Choosing your investment is like choosing an employer.

The second fundamental is that you need to choose a good investment the same way you choose  a good employer. You exchange your time for money so you should take steps to maximize this exchange rate. Always gun for jobs which give you the highest remuneration for your time. Upgrade your knowledge once you hit a plateau in your hourly income.

Similarly, it does not make sense to invest in something that subject you to high expenses and pay your less per unit time. ILPs. unit trusts and hedge funds are generally speaking high costs because not only do you need to pay your financial advisor, you have to pay your investment manager as well. Exchange traded funds and individual stocks are generally low cost if you can minimize brokerage by making bigger buys but they are not marketed aggressively so a lot of DIY effort is required.

c) Compounding makes you rich. 

The third fundamental is that compounding, and not trading, that makes you rich. Money grows exponentially at a compounded interest rate. When someone takes a risk at 8% over 25 years, he will be much richer than someone who takes no risk at 4%, he just needs to stomach more volatility.

To be able to stomach risk, you need a longer horizon which means that you need to start young and compound your assets at a higher rate in your twenties. If you surrender your financial fate to an advisor at a young age, your assets, which could have compounded for the next 40 years, are converted into his commissions, allowing him to reach financial independence and attend more MDRT conferences.

d) Read to build your knowledge.

Once you have these basics in place, in my opinion, your first step is not to jump on the Warren Buffett bandwagon. You should also avoid works which focus too much on motivation and too little on technique. ( Robert Kiyosaki and Harv Eker comes into mind )

A book which balances some motivation and gives you the basics to get started is George Clason's Richest Man in Babylon.

Many of us financial bloggers have products on sale which arms you in the basics on how to get started.

My own product here is Sowing Your Seeds of Prosperity. BigFatPurse has an excellent book on building a Singapore Permanent Portfolio can be found here.

But do not stop there : The holy grail of personal investing is to eventually be able to understand and apply principles in The Intelligent Investor. Mastering this book allows you to take charge of your own portfolio and financial life.

As money is a very interesting topic which I find pretty easy to get obsessed about, I also encourage every beginner to consider taking the CFA exams.

This exam has a ridiculously low pass rate but studying for it can result in a better looking resume - exactly what a young 24 year old would do instead of surrendering his financial future to a so-called advisor.

But generally most readers who are familiar to this program will consider this suggestion overkill.

If you are fresh graduate in your 20s, you are not too old to learn something new. The opportunity cost of picking up skills in personal finance is much lower as your are single and have few commitments.

Don't surrender your fate to a financial advisor.

Become a financial advisor for yourself.

1 comment:

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