In a previous post I talked about how there are many different investment opportunities out there. I talked about how there are hundreds and thousands of different investment brochures and pamphlets. They are all different colours and shapes and sizes. This of course can be very overwhelming if you are not used to this kind of literature.
What you have to remember is that there is only basically six asset classes in which you can invest your money. I would like to talk about one of those asset classes today, that is the commodities class.
Commodities are your basic food or raw materials. Of the top of my head i can think of cotton, gold, pork bellies (still don't know what that means) and of course oil. If you have seen the movie starring Dan Akroyd and Eddie Murphy called Trading Places you may think frozen concentrated orange juice is a commodity but I'm pretty sure it is not traded anywhere although I stand to be corrected.
Commodities can be divided into seven categories:
1. grains and feeds (barley, bran, corn)
2. foods (butter, cheddar cheese, cocoa, eggs, sugar)
3. fats and oils (coconut oil, lard, palm oil)
4. fibres and textiles (cotton, wool)
5. Metals (aluminum, copper, steal)
6. miscellaneous (rubber)
7. precious metals (gold, silver)
By all means think about having commodities as part of your portfolio but don't make that the focus or put 100% of it in commodities you could be heading for disaster. Commodities are great for 10% of your total portfolio.
Wednesday, 21 December 2011
Thursday, 15 December 2011
What is private equity?
Private equity is a general term for raising private money to invest in business ventures. I always make the example of if your brother or sister decide to open a corner fish and chip shop and you give them some money to start the venture then this could be considered private equity.
So, who invests in private equity? Usually high net worth individuals, pension funds, banks, insurance companies and other institutional investors invest in private equity. The minimum investment in private equity are generally quite high so it is out of reach of the average investor.
What happens after you give your money? The venture capital firm that is looking after the investment will pool all of the capital from the investors. The venture capital firm plays are very active role in the management of the companies they are investing in.
What is the catch? Investing in private equity is among the most riskiest of investments. Once you have made the investment, it is very difficult to cash out and in most cases the investor will not get any income. The good news is as long as the investor can accept the high risk and illiquidity of it all the returns can be spectacular.
How can investors get their money back? There are three potential exit strategies for private equity investments:
1.IPO
2. Merger or acquisition
3. Secondary buyout.
The merger or acquisition is the usual one and on this occasion the investor can get their money plus more.
As I said private equity is very risky and you need large amounts of cash but the rewards can be significant. No risk no reward!
So, who invests in private equity? Usually high net worth individuals, pension funds, banks, insurance companies and other institutional investors invest in private equity. The minimum investment in private equity are generally quite high so it is out of reach of the average investor.
What happens after you give your money? The venture capital firm that is looking after the investment will pool all of the capital from the investors. The venture capital firm plays are very active role in the management of the companies they are investing in.
What is the catch? Investing in private equity is among the most riskiest of investments. Once you have made the investment, it is very difficult to cash out and in most cases the investor will not get any income. The good news is as long as the investor can accept the high risk and illiquidity of it all the returns can be spectacular.
How can investors get their money back? There are three potential exit strategies for private equity investments:
1.IPO
2. Merger or acquisition
3. Secondary buyout.
The merger or acquisition is the usual one and on this occasion the investor can get their money plus more.
As I said private equity is very risky and you need large amounts of cash but the rewards can be significant. No risk no reward!
Monday, 12 December 2011
The rule of 72
How long will it take for your money to double in an investment? What a great question.With everything going on in the market today your financial adviser would be well within his or her rights to say, "who knows?" Of course that is a short term view and as most of us should know the market will go up over time. In the short term things are always going to be choppy like the waters of Cook Strait however in the long term we should see returns. So, how do we calculate how long our money will take to double?
We use the rule of 72. "What?" I hear you say, "What is the rule of 72?" Well the rule of 72 is a very easy way to figure out how long it will take for an investment to double. So if you give your money to the bank and they are paying an annual interest rate of 6% then it will take 12 years for your investment to double. If they give you 9% then you guessed it the investment will take 8 years to double. Simple, eh?
The rule of 72 can also be used for inflation. In New Zealand for the last 150 years the inflation rate has been annually 2.7%. So if we divided 72 by 2.7% then we get 26.6. So our money historically will halve in value in 26.6 years.
The last question is of course, why 72? Well, I have no idea. I"m sure some mathematician spent many hours trying to come up with that one. Good on him I say.
We use the rule of 72. "What?" I hear you say, "What is the rule of 72?" Well the rule of 72 is a very easy way to figure out how long it will take for an investment to double. So if you give your money to the bank and they are paying an annual interest rate of 6% then it will take 12 years for your investment to double. If they give you 9% then you guessed it the investment will take 8 years to double. Simple, eh?
The rule of 72 can also be used for inflation. In New Zealand for the last 150 years the inflation rate has been annually 2.7%. So if we divided 72 by 2.7% then we get 26.6. So our money historically will halve in value in 26.6 years.
The last question is of course, why 72? Well, I have no idea. I"m sure some mathematician spent many hours trying to come up with that one. Good on him I say.
Monday, 5 December 2011
Allen Stanford
As a cricket supporter I would like to change my tune today and talk about someone who has played a major role in cricket in the last few years. Late 2008 in Antigua, England played the West Indies in a T20 match with the winning side collecting a cool $20 million for their troubles. The losing side went home, that's it they went home with nothing. It is now history that the West Indies won comfortably by 10 wickets and pocketed the $20 million.
Allen Stanford was the man behind this game. He had been living in the West Indies for a number of years and had grown attached the sport that is cricket. He had planned to organize five of these games with $20 million on the line for each game. Unfortunately for cricket fans and especially the England and West Indies teams only one of these games were ever played as the following year Sir Allen Stanford was arrested on suspicion of been the front man in a fraud of massive proportions called a Ponzi scheme.
I'm not here to pass judgment on whether or not Stanford is guilty or not, in fact I'm kind of hoping that he isn't as I enjoyed the first game they played and would like to see it continue, as even though the West Indies won convincingly it was still quite exciting, especially with the amount of money at stake and the fact that some of the young players in the Caribbean side were about to become instant millionaires.
So, what is a Ponzi scheme that Stanford has been accused of? Basically a Ponzi scheme is an "investment" in which investors are paid returns from other investor's money or even from their own money. There is actually no profit earned by the people running the show. Naturally for the scheme to be kept going you need an endless supply of investor's money. This can be done when the investor re-invests his or her money because understandably they are happy with the results.
So how do these schemes get found out? Well they get found out one of three ways:
1. The people behind the scheme disappear.
2. The scheme can collapse when the returns are so good that the people behind it have problems paying the returns and everything turns to custard.
3. The whole scheme gets exposed by a whistle blower or external market forces.
What is the moral of the story? If it is too good to be true, it probably is or do your own due diligence before making an investment.
Allen Stanford was the man behind this game. He had been living in the West Indies for a number of years and had grown attached the sport that is cricket. He had planned to organize five of these games with $20 million on the line for each game. Unfortunately for cricket fans and especially the England and West Indies teams only one of these games were ever played as the following year Sir Allen Stanford was arrested on suspicion of been the front man in a fraud of massive proportions called a Ponzi scheme.
I'm not here to pass judgment on whether or not Stanford is guilty or not, in fact I'm kind of hoping that he isn't as I enjoyed the first game they played and would like to see it continue, as even though the West Indies won convincingly it was still quite exciting, especially with the amount of money at stake and the fact that some of the young players in the Caribbean side were about to become instant millionaires.
So, what is a Ponzi scheme that Stanford has been accused of? Basically a Ponzi scheme is an "investment" in which investors are paid returns from other investor's money or even from their own money. There is actually no profit earned by the people running the show. Naturally for the scheme to be kept going you need an endless supply of investor's money. This can be done when the investor re-invests his or her money because understandably they are happy with the results.
So how do these schemes get found out? Well they get found out one of three ways:
1. The people behind the scheme disappear.
2. The scheme can collapse when the returns are so good that the people behind it have problems paying the returns and everything turns to custard.
3. The whole scheme gets exposed by a whistle blower or external market forces.
What is the moral of the story? If it is too good to be true, it probably is or do your own due diligence before making an investment.
Tuesday, 29 November 2011
Woo Hoo! I won some money in the lottery
Congratulations you won some money in the lottery. Unfortunately you can't buy a house in Beverly Hills or take over the world like a James Bond villain but you can make a difference in your current financial situation.
So, what should you do with the dough?
First of all pay off those bad debts. You know the ones, the credit cards that charge you a zillion percent interest or the loans on your flash car.
Secondly replenish that cash reserve that you dipped into to take the holiday to Thailand over the Christmas period. Naughty you.
Thirdly allocate some to your retirement account and your fund that you have set up for your children for educational purposes.
Finally with the remainder pay down your mortgage.
Now isn't that a great plan? Resist the temptation to buy that bigger house down the road or a flash new car or a new jet ski or some extravagant toy that you may only use a handful of times.
Of course you don't have to be 100% disciplined taking that holiday to Rarotonga is fine, just don't do it every month.
So, what should you do with the dough?
First of all pay off those bad debts. You know the ones, the credit cards that charge you a zillion percent interest or the loans on your flash car.
Secondly replenish that cash reserve that you dipped into to take the holiday to Thailand over the Christmas period. Naughty you.
Thirdly allocate some to your retirement account and your fund that you have set up for your children for educational purposes.
Finally with the remainder pay down your mortgage.
Now isn't that a great plan? Resist the temptation to buy that bigger house down the road or a flash new car or a new jet ski or some extravagant toy that you may only use a handful of times.
Of course you don't have to be 100% disciplined taking that holiday to Rarotonga is fine, just don't do it every month.
Monday, 17 October 2011
Investing in the Rugby World Cup
For many of you, the last month or so would have had you glued to the television. With the Rugby World Cup being held in New Zealand, it is great opportunity for New Zealand to showcase itself to the world. Obviously many tourists from all parts of the world are in New Zealand at the moment enjoying the various tourist attractions that are on offer. The tourists are experiencing the New Zealand hospitality and the also the culture of rugby that maybe only Wales can match. Who knows, maybe some tourists are in New Zealand to not only watch the rugby but to explore the various investment opportunities that New Zealand has. This got me thinking, which part of the rugby team would you see yourself investing in. Lets take a look.
You can divide the fifteen people in a rugby team into six groups. The front row. These guys do all the hard work. It isn't pretty and the gains are not substantial but without them the team would be like a ship without a rudder.
The locks are a little bit more visible than the props. They are winning all the ball in the lineout and are running around the field chasing the ball. They consistently put in a great effort week in and week out however they owe a great debt to the props.
The back row are some of the busiest players on the field. They are running around up in the clear and then you will see them down in the ruck. They are the guys who probably do the most running in a game. Of course they have their up moments and down moments but over the course of a match they are sensational.
In rugby the forwards and the backs are sometimes seen as two different entities. They don't seem to link at and especially on cold wet days the forwards won't let the backs see the ball. The backs are also divided up into three areas.
The halves. These guys run the show. Every good rugby team needs a good 9 and 10. They cover a decent chunk of real estate in the games and never seem to tire The famous players down the years, a lot of them come from these numbers.
The centres. In a lot of teams these guys are the real raw component that makes up the team. These guys can also have their ups and downs but any good rugby team would be poorer without the a great centre combination.
The back three. These are the pretty boys of the team. They are traditionally the ones that are the furthest away from all of the action.They are a collection of fast runners and brute strength,
So which one would you invest in? I would go for the a combination of the forwards, depending on what kind of risk I want to bear in running the ball. I would hold the ball in the forward pack and about 20% of the time let it out to the backs.
GO THE ALL BLACKS!!!!!
You can divide the fifteen people in a rugby team into six groups. The front row. These guys do all the hard work. It isn't pretty and the gains are not substantial but without them the team would be like a ship without a rudder.
The locks are a little bit more visible than the props. They are winning all the ball in the lineout and are running around the field chasing the ball. They consistently put in a great effort week in and week out however they owe a great debt to the props.
The back row are some of the busiest players on the field. They are running around up in the clear and then you will see them down in the ruck. They are the guys who probably do the most running in a game. Of course they have their up moments and down moments but over the course of a match they are sensational.
In rugby the forwards and the backs are sometimes seen as two different entities. They don't seem to link at and especially on cold wet days the forwards won't let the backs see the ball. The backs are also divided up into three areas.
The halves. These guys run the show. Every good rugby team needs a good 9 and 10. They cover a decent chunk of real estate in the games and never seem to tire The famous players down the years, a lot of them come from these numbers.
The centres. In a lot of teams these guys are the real raw component that makes up the team. These guys can also have their ups and downs but any good rugby team would be poorer without the a great centre combination.
The back three. These are the pretty boys of the team. They are traditionally the ones that are the furthest away from all of the action.They are a collection of fast runners and brute strength,
So which one would you invest in? I would go for the a combination of the forwards, depending on what kind of risk I want to bear in running the ball. I would hold the ball in the forward pack and about 20% of the time let it out to the backs.
GO THE ALL BLACKS!!!!!
Thursday, 1 September 2011
Learning from the self help master
I was reading a friend's review of a Brian Tracy book the other day. For those of you who do not know Brian Tracy, he is a Canadian self-help author. He has written many books on self development and how to get the best out of yourself. The aforementioned friend gave me a Brian Tracy book a few years ago and I have been hooked on "BT" ever since.
What struck me about this review that my friend did, was the financial independence section.The financial independence chapter as you can imagine is many pages but my friend summed it up in four lines:
1. Earn as much as you can
2. Spend as little as you can
3. Save and invest as much as possible
4. Protect yourself against unexpected reversals.
It is so simple when you look at it like that isn't it. I'm sure you remember the three pillars of financial planning:
1. Cash reserve
2. Income protection
3. Pension
These three pillars are all covered in the above summary of the Brian Tracy book. Where are you on this? Do you have a cash reserve? Do you have protection? Do you have a retirement plan? No? You better get started. Don't hold it off to tomorrow. Get started. You will be happy that you did.
What struck me about this review that my friend did, was the financial independence section.The financial independence chapter as you can imagine is many pages but my friend summed it up in four lines:
1. Earn as much as you can
2. Spend as little as you can
3. Save and invest as much as possible
4. Protect yourself against unexpected reversals.
It is so simple when you look at it like that isn't it. I'm sure you remember the three pillars of financial planning:
1. Cash reserve
2. Income protection
3. Pension
These three pillars are all covered in the above summary of the Brian Tracy book. Where are you on this? Do you have a cash reserve? Do you have protection? Do you have a retirement plan? No? You better get started. Don't hold it off to tomorrow. Get started. You will be happy that you did.
Subscribe to:
Posts (Atom)