Moneywise24 Personal Finance

I want to end this evening with a small post on making a difference, whether it is about making a difference at work, at your sports club, or simply doing something small for a relative or a good friend.

I find making a difference extremely important; it keeps the mind young, the inspiration going. It could be about doing something extra for your line manager at work, perhaps coming up with an innovative idea, or creating someting new. Or, perhaps you find some information that a friend is looking for.

Whatever it might be, I started to ask myself “what difference did I make today”? It helps me to make the best of each day, and to get the most out of it, knowing that my actions of today will shape my future.

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I have started practicing Kendo about half a year ago. Kendo is a Japanese martial art, and it derives from swordfighting, and it is a form of Japanese fending, which is practiced in armor and with a sword made out of bamboo. Although six months is not a lot, I find that there is a lot to learn from martial arts in general, and the more I dig into the ancient way of the samurai, there are many principles which can be projected to our lives today.

Kendo is a close combat sports, tournaments are held over the entire world. There are a few basic criteria which need to be met in order for a point to be valid; these criteria apply to our lives too in a sense. I would like to introduce these principles here.

Precision

The bamboo sword, also called Shinai, has three parts. The first criteria for a point to be valid is that the strike of the sword onto the opponent should take place with the first third of the sword, and either the head, middle region, hands, or larynx may be struck. A strike may not be coincidental, in that case the strike is not valid.

In our lives, we tend to do many things with little precision, on the side, not being focused. If things succeed, it is often a result of coincidence than precision. The first principle is to be precise and focused whenever wanting to achieve a goal. It increases the success rate, and it allows for taking full responsibility when you succeed.

Determination

In kendo, each strike has to occur with determination. This is often expressed by stamping the right foot on the floor, and shouting at the opponent. Additionally, there is no way back; once you go in for the strike you have to finish it, with the risk of a counterhit (or being killed if it were to be real battle).

In life, people who are the most determined are the most successful. They stay focussed, and are determined to bring a project to end, either being successful or failing. In fact, the ancient samurai would live for death. This does not mean that the samurai would enjoy death, but that avoiding death in battle would result in a more passive attitude, and missing out on great opportunities.

Be present

In Kendo, there is a lot of shouting. There is shouting when we strike, there is shouting when we defend, and there is shouting when we simply stand around. While striking, shouting demonstrates determination and power, but shouting also makes yourself stand out, it makes you heard and present.

Whenever we do something in real life with precision and determination, we often do it secretly, hoping that nobody would find out. By doing the exact contrary thing, by making yourself heard and simply being present, you demonstate your determination while being able to conduct self-marketing and perhaps build your network. Being present is an extremely powerful tool for standing out of the crowd.

Be in control

In Kendo, you have to control the situations at all times. Even after a strike, the attacker needs to keep an eye on his/her opponent, and control the situation. It is easy to think that after the strike the battle is over, but many things can happen even after that.

Maybe you have that experience yourself: you finished an important task, and you thought it was over… but that was when different issues really started coming. Therefore, it is important not just to focus on the action itself, but also what happens before it, what happens after it, and what happens around it. When keeping this view, you are in control of the situation and you can react quickly and any time as you deem appropriate.

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I bet everyone knows the term “hedgefunds”, especially since they have had a lot of negative publicity in connection with the financial crisis. Still, the main principle of a hedge fund is clever and straight forward: by allocating a part of the portfolio to anticipate on a downturn of the market, the portfolio is protected against sudden negative movements of the stock exchange. Hence, a hedge fund in a classical sense seeks to diversify its portfolio in such a way, that it can benefit from both a positive and a negative market.

I have been playing around with different methods in order to protect my (still small) portfolio against a sudden negative downturn. Since I know options quite well, I have used put options to protect my portfolio against sudden negative movements.

Option basics

The basic principle of a stock option is that it gives a right to buy (call) or to sell (put) a particular stock during a given period at a pre-set price. The fact of buying or selling stocks in this example is quite irrelevant, since a call option itself will increase in value when the stock’s price increases, and the put option will increase in value when the stock’s price falls.

Options can be bought on virtually anything, on stocks, oil, gold, or an index.

Buying a put option on a market index

Sometimes, concerns over a particular topic can result in sharp downward movements of the market. This does not mean that the stocks in my portfolio are bad, it is a momentarily event. If I buy a put option on a market index, I can profit from this sudden downturn market.

Since my strategy was only for the moment, I bought a put option with a relatively short timespan, say one month. Additionally, I bought an option which was out-of-the-money, meaning that the strike price is below the current price of the index; this makes the option cheap.

Last, I bought the put option with a very limited amount of money, and it made only 5% of my total portfolio.

What happened

Concerns over Greece, Ireland, the earthquake in Japan as well as political instability in the Middle East caused the index to drop by an average of 1% each day. The put option I had in my portfolio virtually exploded, since the expectation of a further decline of the markets were fed by the world news.

Although my portfolio, which in general is quite stable, fell with around 5% or 6% (I have quite some options in my portfolio, so profits and losses are considerable sometimes), my put option on the index increased by 200%. I sold the option with a nice profit, and was able to neutralize the losses on the rest of my portfolio.

Risks involved

Buying and selling options is not without risk. Especially when buying out-of-the-money options, where the price is purely based on expectation, the option can become worthless in a few days, or even a few hours. If the market does not move as you had anticipated, then you may expect to lose some considerable amount of money. Therefore, it is absolutely vital not to invest too much money into options (I would say a maximum of 10% of the total portfolio’s worth), but spread your portfolio between multiple products.

Another risk when buying options on a market index is, that sometimes particular stocks which are performing in the extremes (both positive as well as negative) may push the index contradictory to the general market sentiment.

Before investing in options, be sure to get informed yourself about this product, or speak with your financial advisor.

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For some time throughout my life I had been avoiding restaurants completely. I knew I was on a tight budget, and I felt like dining (or lunching) out was eating my budget away. At a certain point, I felt that something was missing. Often, going to a restaurant is a fantastic opportunity to bond with friends, to exchange some ideas about various topics, while enjoying a nice meal.

Nowadays, I am back to going out to restaurants, but I always try to limit the impact on my budget by following a few simple rules.

Control the frequency

I often used to visit a restaurant when I simply didn’t feel like cooking. During some weeks, I went out dining five times, which is a lot. One thing I learned is not to go out due to laziness, but because I wanted to meet up with friends, have a great time, while eating something that I would not be able to cook at home. I am a great fan of international food, so I would frequently go to a good Italian restaurant, or an Asian restaurant. However, I’d be picky when to go. I have now limited my frequency to a maximum of about once a week.

Check the price level

There are some great restaurants out there, but many of them are simply overpriced. They might have an exquisite menu, and perhaps one or more Michelin stars, but if the restaurant is clearly above my living standard, I will simply not go there. Sometimes it means saying ‘no’ when I am invited, but I feel that in the end it pays out. Additionally, I don’t need to feel bad about my finances when I have just paid 120 Dollars on a meal. There are some great restaurants out there with very moderate prices too.

Picking the right dish

I often used to pick the best piece of meat, or in a Chinese restaurant where ordering multiple dishes is often usual, I’d pick three or four dishes, since I wanted to try it all. Naturally, I couldn’t even eat half of it, and the food needed to be thrown away.

When picking what I want to eat, I realize that I don’t have to pick the most expensive dish. I pick a dish which is right for me, and which is nutritious. Sometimes I might even only pick a starter dish; it keeps the calories away, and in summer I generally prefer to eat something light.

Beverages

A lot of money is earned by restaurants on beverages. It is often very tempting to pick a very good wine with the starter, another wine during the main dish, and perhaps a cocktail afterward. Still, I find that the difference in quality between a low priced and a high priced wine is not that great. Additionally, I stopped drinking cocktails some months ago, since they are true calorie bombs, and I want to cut back on the alcohol anyway. Often, I can enjoy the entire evening with only one wine, and perhaps a beer afterward… and I am happy.

Coupons

If I have a coupon, such as “two for the price of one” I will use it. It is a great and easy ways to save some money.

Focus on the conversation, not the meal

One last thing, which I had to learn over time, is to focus on the conversation and the company more than the food. I had some awkward situations where I was visiting a restaurant with friends, and in the end we were all eating silently; the only conversation we had was about how good the food was, and who was going to order a desert.

By focusing on the conversation, attention is drawn away from the food. It made me to eat slower, enjoy my food much more, and interestingly it also prevented me from wanting to order more and more and more.

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In many countries, employees have the benefit of receiving a bonus, such as a 13th month’s salary, or an extra fixed sum for holidays. Often, these bonuses are paid one-off at some point during the year, which is welcomed by many employees.

Many people find this way of being paid an incentive very pleasant; it allows them to not spend the money throughout the year. Still, it might actually pay off to have any form of incentive split into 12 pieces, have it paid throughout the year, each month. Although it does require some discipline, the following should might be considered:

Mental Accounting

One-off bonuses are usually seen as it is, a bonus, or a little extra. Since you did not anticipate this, and it comes on top of your monthly salary, many people spend the money as quickly as they have received it. In fact, many people have a little trick going on in their mind, categorizing the extra bonus as being “extra”, and that spending this “extra” money does not affect their savings account or their investment.

This form of mental accounting is very deceiving. Bonuses, or parts of it, are just as any other form of income, they can be saved or invested as well, and do have to be spent on holidays or expensive gifts. Still, many people behave otherwise as a bonus is being detached from their other means of income.

Having a bonus or incentive split and paid out throughout the year each month makes it part of your monthly salary. By having it paid out on a regular basis, it allows you to see it more as part of what you earn monthly, and therefore make wiser decisions. In addition, you can better anticipate what you receive each month, and do your planning more accurately.

Interest

Any money that is earned has the potential of receiving interest; therefore, any money that is not earned has the potential of not receiving interest. As a result, people who are being paid bonuses one-off are missing out on interest, that could have been earned if part of the bonus would have been paid each month.

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