Moneywise24 Personal Finance

Sometimes I am wondering, what I do all this for. I mean, all the work, financial planning, breaking my head over my retirement planning. Often, a typical month would look like this:

• I work the hard, the entire month,
• I pay taxes on my salary, and receive about half of my salary on my bank account at month’s end,
• I pay for my loan from college times,
• I pay my rent, and all other bills,
• I cover for my expenses,
• And, with a bit of luck, I will have some money left and the end of the month.

Often, when I have something left at the end of the month, I am so proud of myself that I give myself a treat and spend the money anyway. Or I start traveling and go places… so in the end I have nothing left anyway.

I stumbled on this chapter in “The Cashflow Quadrant” by Robert T. Kiyosaki. Kiyosaki writes, that you should pay yourself first, before spending any of your hard earned money.

The basic principle is, that you should look at yourself as a running business. And the main purpose of a running business is to make profit, and to increase assets. What individuals do in stead is focussing on paying the bills first, i.e. other people’s profits and assets, before they focus on their own life.

So what does this mean? Read the rest of this entry →

Possibly Related Posts:

• Markets Plummet As The Fear On Europe’s Debt Crisis Dominates
• Rising Stock Markets, But With Caution
• The Benefits Of Periodical And Automatic Investing In Mutual Funds
• How Much Tipping Is Accepted in Europe?
• 3 Easy Ways To Save Money During A Weekend Trip (to Prague)

I consider long-term investing in stocks/shares as a crucial element of building wealth; in fact, you will most probably find this confirmed by most personal finance blogs on the internet. This also brings a number of interesting questions, such as how we can pick the best investment opportunities, and on what do we base our investment decisions. In the next few weeks, I intend writing a number of articles, focussed on how to analyze company stocks and investment pportunities.

Currently, there are two main methodologies for analyzing and possibly predicting the future value of a stock or share. These are:

• technical analysis
• fundamental analysis

Technical Analysis

The basic principle of the technical analysis, also called chart analysis or market analysis, is to identify potential buying or selling signals, and generally predict the future development of a stock price by its historical price and volume data. While doing this, the actual company data (e.g. annual reports, strategies, developments) as well as other economic factors are are not being involved in the technical analysis. Technical analysis is based on the fact, that particular price and volume patterns in the past have frequently been followed by a particular price and volume movement. Technical analysts attempt to identify these patterns, via the calculation of many different indicators, aiming at identifying buying and selling signals.

Technical analyses can be conducted using different time frames; long-term, mid-term, or short-term.  Additionally, technical analysis is largely based on the fact, that a stock’s price is largely determined by supply and demand of investors, irrelevant to what the actual company is worth. However, many technical analysts combine their technical findings with current macro and micro economic trends, in order to find whether these are in line with each other or not.

The topic of using technical analysis as a stock analysis method is quite controversial, as it does not attempt to involve the actual company’s performance. Many analysts swear by the technical analysis, others prefer using fundamental analysis methods.

Fundamental Analysis

The fundamental analysis is based on researching the fundamentals of the economy and the company. The fundamental analysis includes analyzing the annual reports of companies, specific ratios, the strengths and weaknesses of a company, potential development opportunities or threats, as well as macro economic developements. Fundamental analysts assume that generally the stock price reflects a company’s real performance, keeping in mind that sudden micro or macro economic news, market fluctuations, or sudden panic might let the stock deviate from its course. The fundamental analyst therefore attempts to identify which stocks are undervalued, overvalued, yearly earnings, and future potential.

Fundamental analysis is adopted by many large financial institutions, who publish their mid- and long-term view on a particular stock’s development. Also Warren Buffett used the fundamental analysis to select his stocks, or why do you think that the book “Warren Buffett and the Interpretation of Financial Statements” is about a company’s financials rather than technical analysis?

Each person will have his or her own preferences. Myself, since I aim to invest with a long-term vision and also share the idea that generally a stock will move in the direction of a company’s performance or potential, tend to adopt the fundamental analysis as my main investment strategy.

Possibly Related Posts:

• Markets Plummet As The Fear On Europe’s Debt Crisis Dominates
• Rising Stock Markets, But With Caution
• The Benefits Of Periodical And Automatic Investing In Mutual Funds
• The Top Reaon Why You Should Pay Yourself First
• Passively Investing In Turbulent And Insecure Times

Every now and then I have been thinking what I would do if I would win a few million in a lottery, or in the casino. I am sure most people have, perhaps you have. I have been discussing all possible scenarios with my friends, and often we ended up talking about expensive sports cars, yachts, luxurious estates and world travel. Honestly, if this is really how I would spend my millions, I would probably be instantly in debt.

I watched a documentary the other week, in which they were looking at what people had done with the millions they had won in a lottery, and as it became obvious, most people had spent their money very stupidly. A psychologist was asked about this phenomenon, and he claimed that it is only logical; these lottery winners were not at all used to thinking in dimensions of millions. They were literally thrown out of their own reality, which caused them to make irrational decisions.  This particular documentary set me to think: how would I handle that much money.

Keep my job

Okay, I have to admit, it really depends how much I won. But at least at first, I would definitely keep my job. Especially if I can not live off interest and maintain a good standard, what is the point in quitting my job? Besides that, I love my work. I might quit at a later time, but first I want to see how things are developing.

Cash Savings

Before I would do anything with the money, I would put some part of it on a savings account. Call it an emergency account if you want to, the money is intended for emergency situations, and in case I would lose everything. This money should allow me to start all over again just in case things go wrong. I would probably put aside about two years of my current salary.

Real Estate

Currently, I am renting an apartment, this might be one of the first things I want to get rid of. I would probably buy something bigger and more central than what I have now, but I do not see the point in buying a luxurious estate, which would vaporize most part of my money. A nice 2- or 3-bedroom condo in the city center will do, nicely furnished, a place where I feel good and comfortable. Besides, I am conscious of the fact that the bigger and more luxurious the estate, the more tax and other yearly expenses I will have. Real estate offers me the benefit of lowering my monthly expenses (my monthly rent) while making a long-term investment. Alternatively, I might purchase more than only one object, which I would rent out if I am not using them. This way, the incoming rent will compensate for my expenses I have on the real estate, and I am investing money with a long-term focus.

Long-term investments

At least half of my winnings, if not more, I will invest long-term on the stock markets. Firstly, I want my money to grow over time and it to gain value. Secondly, I want to obtain dividend payouts. If these dividends are high enough, they could even substitute for my current job, either partially or completely. But until I have reached a certain threshold, I would keep my job.

Business

If I feel entrepreneurial, I would perhaps start a business. However, I will do this with great caution. I do not have great experience with running businesses, so I will start small, even though I have the necessary funds to start big. By gaining experience, I can build my business from there, and engage into bigger businesses over time. The documentary I was writing about earlier showed a man, who invested most of his money in a bigger type of manufacturing business, which went bankrupt due to his inability to run that business. By the way, the guy ended up broke, and his wife left him. So did many of his friends.

Education

I am a fan of life-long learning, whether it is a new language, an MBA, or something else which I find interesting. I consider education an important part of my personal development.

Something needs to be spent, right?

Good, I have to admit; of course I will spend some of that money. I might buy some fashion, perhaps travel the world, buy a more fancy car, or take my flying license. I will definitely give myself some treats, but I will do this in a dimension I understand. I would hardly start to buy business suits worth 5,000 Dollars, as this is a dimension of spending I am not familiar with, and which I do not need either. The same goes for my world travel: I might fly business class on long distance flights, but I don’t see the use of paying 8,000 Dollars or so for flying first.

I am in charge of my money

I recognize the fact, that once I win the lottery I will probably be approached by many so-called consultants, who would recommend me to invest my money here or there. But I will, at all cost, remain fully in charge of my own money. I might consult someone I really trust, who may give me advice of specific trends and market developments, while at the same time I make my own decisions.

Honestly, I have never been in a situation of winning millions. However, I believe that becoming suddenly rich can be quite problematic for many people. And even if I am gaining wealth slowly over time, I will cherish the above points, in search for long-term growth, development, and a stress-free life.

Possibly Related Posts:

• Why Cheap Stuff Comes At A Very High Price
• Why Shyness And Social Anxiety Can Be Your Worst Enemy
• Spontaneity vs. Keeping An Agenda
• The Nonsense Of Discrimination
• What Did YOU Do To Make A Difference Today?

I know, it’s a bit awkward that I am writing a post on option trading, while on the other side my website is about long-term financial development. Nevertheless, I remember being very active in options trading as a student, just like most of my fellow-students, and actually it did earn me some money. In addition, options can be a great strategy to use as an insurance, in combination with shares. In this post, I am mainly referring to European options. Also, please keep in mind that not in every country option tranding is possible for individuals.

Options are much like insurances: they give the buyer the right to buy a specific item, during a certain period, for a certain price. Options exist for many items, perhaps one of the most well-known is real estate. Consider the following example:

Your are considering buying a nice holiday home in France. You see a nice real estate you like for 300,000 Euros, but you are not quite sure about the purchase. In addition you need to clarify some formalities with your bank, such as whether or not you will be granted a mortgage. Knowing that this process might take 2 months, there is a risk that someone else buys the real estate and takes away this opportunity from you, and there is a risk of rising real estate prices; In 2 months time the real estate might be worth 330.000 Euros. By buying an option, you will obtain the right to buy that house (also called the underlying value) during a certain period, for a pre-set price of, let’s say, 300,000 Euros. As such, even if the real estate price has increased to 330.000 Euros, you will still be able to buy the object for 300,000.

As with real estate, you could buy options on stocks. Stock options come in two forms: call options give the right to buy specific stock for a certain price (strike price) before a pre-defined date (expiration date), and put options give the right to sell specific stocks for a strike price before the expiration date. Now, being able to exercize that right does not mean you have to. With a changing price of the underlying value, the option price will change too, and you can simply trade in options, aiming at making profits from it. There are actually three things you can do with an option:

1. You can buy an option and sell it at a profit later.
2. You can buy an option and at a later point exercize your right to buy or sell the underlying value (when selling the underlying value, you need to possess it).
3. You can buy an option and let the option expire at the expiration date: the option will end worthless and will be taken from the market.

Apart from purchasing options, you could issue them. This is a highly risky business, since issuing an option would result in a limited profits (the price that the buyer has to pay for the option) and a theoretical unlimited loss, as opposed to buying options, where the risk is to lose the money invested in that option, but profits are theoretically endless. If you are just getting acquainted with stock options, I’d recommend to focus on buying options only, and with smaller amounts.

How options are listed

Options are listed in a specific way. Look at the following examples:

ING C 0912 9.00 lists a call option (note the C) on the stock ING, expiring on december 2009* with a strike price of 9.00 Euros.

ING P 1003 11.00 lists a put option (note the P) on the stock ING, expiring on march 2010* with a strike price of 11.00 Euros.

*Note: the expiration date in any given month is usually the third friday of that month.

This is how options work

How options work exactly can best be explained by the following example:

Let’s take the ING call option example from above. The strike price of the option is 9.00 Euro, and the stock itself closed at a price of 9.53 Euro today (19 november 2009). This means, that if I would would have the ING C 0912 9.00 option, I could buy the ING stock at a price of 9.00 Euros, although the real price of the stock today is 9.53. As a result, the stock price must at least cost 0.53 Euro; if the option would cost less, I could make an immediate profit by buying the option and immediately exercizing my right. This difference is called the intrinsic value. In addition, there are also option series with an intrinsic value of exactly 0, and there are option series with a negative intrinsic value.

Suppose the stock price would tomorrow increase from 9.53 to 9.69 Euros, which is an increase of 1.65%, the option price must increase to at least 0.69 Euros (else someone would be able to make immediate profits). But look at what happens: from 0.53 to 0.69, that’s an increase of 23.1%.

Put options work exactly the other way around; they are rights to sell stocks, and thus if the stock price decreases, the value of the option would increase. This is one feature what makes options so interesting; it allows for making profits in both increasing and decreasing markets.

Note: options are bought per contract, 1 contract includes the option to buy, for example, 100 shares. So, if an option is priced at 0.53 and you would buy one contract, you would actually invest 53.00 Euros.

This example shows the leverage effect of options, that everyone is talking about. But be cautious: whereas there is a leverage effect on profits, the same leverage effect applies on losses!

The options’ price structure

As we saw in the above example, the intrinsic value of the above option is one element of the options’ pricing. However, if we look at the real value of the INC C 0912 9.00 series, we see saw that this option is currently being traded for 0.83 Euros.

There two important elements, which influence the pricing of an option. This is one of the reasons why options are so risky:

• Time value: the more time is left until the expiration date, the higher the time value of an option. The reason is that more time equals a higher chance (or expectation) that the stock will move in a certain direction. If I look at the price of the same option, but with an expiration date in january 2010, the price is 1.10 Euros.
• Expectation value: if a stock is very volatile, or if there is a high expectation that it will develop in a specific direction, this might add up to the expectation value of the stock price.

Considering the pricing of an option, the worst thing that can happen is to own an option on a stock, which is stable; a stock’s stability is the stock trader’s enemy, since expectations and the time value will become less and less. This is what makes options risky: although you would not have gained or lost anything on the stock, the option is becoming worth less, and you are losing money over time.

Get professional advice

This article explains some of the basic principles of options. There are so many different types of options and option strategies, that I would highly advise to read in-depth material and consulting a specialist before attempting to trade in options yourself. Option trading bears a very high risk.

This post is in no way a subsitution to professional advice and should not be seen as such. Moneywise24 can not be held responsible for any personal decisions. Please also refer to our disclaimer at the bottom of this page.

Possibly Related Posts:

• Markets Plummet As The Fear On Europe’s Debt Crisis Dominates
• Rising Stock Markets, But With Caution
• The Benefits Of Periodical And Automatic Investing In Mutual Funds
• The Top Reaon Why You Should Pay Yourself First
• Passively Investing In Turbulent And Insecure Times

I was thinking a few things over last night, amont others how my financial situation would look if everything crashed: stocks plummet and I would lose my job due to a financial crisis. In my case, this wouldn’t look good at all.

Currently I keep 3 different bank accounts:

• a checking account, where my employer transfers my monthly income, and which I use for day-to-day expenses.
• a short-term savings account, which I use to park money which I do not need immediately. I use this money for clothes, a new computer, furniture, etc.
• an investment account, which I use to buy shares and make other long-term investments.

I figured, one thing is missing. What happens when I would lose my job, and my investments would plummet? Or if my house is burnt down and I need money immediately in order to start up again with having nothing? It came to me, that having an emergency account is actually of great importance. For me, an emergency account would ideally be an account which has virtually no risk of the money being lost. Probably, the best solution is a savings account, with a potentially low interest, where the money is ‘parked’, but always readily available, for situations when I would need money fast.

The Bank

Different banks have different policies. We may assume, that each bank will invest our money and our savings into some form of investment, share, or fund, and in exchange we receive an interest. My biggest concern when selecting a bank, is the amount which I am guaranteed to have when things go heavily wrong with the economy. We have probably all heard about the Iceland banks and its account holders, who lost all its money since the bank did not have enough reserves available when shares plummeted with the financial crisis in 2008. Myself, I am Dutch, and I know that my bank guarantees reserves of at least 25,000 Euros per account holder; the governement is thinking about raising this amount to 100,000 by law. Surely for those having some million Euros on their bank accounts, it poses a great risk. But for my purposes, it will definitely do.

Availability

The second criteria is that my money is always readily available when I need it. Firstly, this means that the account type itself is not locked for a specific number of years, and I am allowed to transfer money from that account to my checking account when necessary. Second, it means that the bank should have an online banking system available, which operates in real-time, and that transfers are conducted immediately. I currently have accounts at two different banks; one of them, for example, would withdraw the transfer amount from my account but keep it for a couple of days before transfering it where I want it. This means that the money which I might need in an emergency situation is not available for a few days; not good.

Interest

I do not want my money to sit around without any interest being paid. Since I will not be investing this money anywhere, I will look at the best interest deals available, within the frame of the two previous points mentioned. As such, my money can grow over time.

Amount

The amount, which should sit on the account, should be enough to either be able to live off it for a period of 6 month in case I have no income, or it should be enough to build a new existence from nothing. The exact amount, which someone needs should be determined on a case-by-case basis, but below is the calculation I made for myself:

• My monthly living expenses are approximately 1,200 Euros per month. These are only necessary expenses, which I will have in any case, and does not include clothing, excursions, or anything which I do not need to get by. 1,200 Euros over a period of 6 months is 7,200 Euros.
• Looking at the 7,200 Euros above, this is also quite sufficient to build up something new; initial costs for renting a new apartments, costs for moving existing furniture to the new place, or buying new furniture.

The biggest trick, ofcourse, is not to touch this money whatever happens. If I do not badly need it, it should simply rest on my account. Should I not have needed the money until my retirement, I can then use it as a small retirement bonus.

By the way: if I leave this 7,200 Euros sit on the account for 30 years at an annual interest rate of 3.0%, it will be worth 17,476 Euros by the time I retire; that is a really nice trip around the world.

Possibly Related Posts:

• Modern Money Mastery – A Personal View
• The Sexy Side Of Personal Finance
• Learning How To Prosper
• Personal Development and How To Manage Change
• The Top Reason Why You Should Stop Looking for a Better Job