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Attended a symposium sometime back and one of the speakers, Gabriele Vincenzo explained the concept of risk that stuck with me. That is, risk as a precondition for return rather than an undesirable by-product of return. All in all, the key is to ensure that the risk is ‘Intended Understood Quantified & Compensated’.

While commuting this morning I also thought of the two most unintended risks that people take. Inflation & cash flow risk (or liquidity risk). These are typically the factors that result in missed opportunity or pushes people to make suboptimal decisions; or being unable to make any decision at all.

Inflation is a risk that is understood by most but not compensated unless we actively plan for it. To put things into perspective, I’m gonna use my fav example: If you have $1000 today, you can buy 333 plates of chicken rice. In 20 years time and assuming inflation to be 3%, you will only be able to afford 185 plates.

So… if we see risk as a precondition of return, I would say that inflation is an unworthy risk to be taking..

Time for work.. More on cash flow risks later. 😉

For part 1 of Why people put off investing

Following up on the previous post, the second reason why people put off investing is because of the belief that

#2 that they do not have enough money to make significant impact to their financial status

This is especially common with the younger crowd who are dealing with more immediate financial needs & wants.

Is there truth to this? Yes.
Is there another side to the story? Most definitely too – because while you may not have enough money, you have enough time.
So let’s first illustrate this the usual boring way and imagine that you are 25 and that you set aside $500 a month for retirement at 65. At 7%p.a return, you would have a nest egg of $1.3million then – is this a significant amount considering inflation? maybe not. but thing is, you would still be better off than not doing anything at all.
Despite this, many of the people I meet also go with the mentality they can put off investing now and make up for it by investing more in the future, when their income increases. I know of multiple reasons why that may not pan out as successfully but what I really want to share is this:

The impact of investing early goes beyond just wealth accumulation. When we start investing early, we are also accumulating experience early- which is what will make all the difference in the future. The significant impact.

Starting early allows you the opportunity to experience the ups and downs of the stock market – enough for you to understand and learn what to do and what not to do. And to put it really bluntly, the whole experience would be easier to stomach now than in the future, precisely because the invested amount would be much smaller. The emotional attachment to an investment of $20k would (should) be much lesser than an investment of $500k.
And as it is, the earlier you experience it, the more chances for you to do it over again – because fact is, there is a limited number of market cycles that we get to participate in, in each of our lifetime.

as always, the next time you think you do not have enough to invest to make a significant impact to your financial status, think again and think beyond money.

while writing this, it also got me thinking about the other conversations that I had with a couple of friends… about how so many of us go about life with the internal conversation that we do not have enough – not enough time, not enough money. or.. believing that we do not have enough to give, to love and to lose. maybe it’s time we have a paradigm shift. hm

I came across this article on Personal Financial Myths. And one of the myths is “Budgeting is the best way to save money”.

the essence of it is that people will keep to their budget

The article quoted Jeff Larson, the study’s co-author and an assistant professor of marketing at Brigham Young, stating that when consumers set a budget for a specific item, they oftentimes limit their searches to items priced close to the budget’s upper limit.
For example, if given $1,000 for a flat-screen TV, for instance, consumers are likely to limit their selection to televisions priced between $800 and $1,000 before looking at each TV’s features. The more effective way would be to base your shopping on specific features and qualities.

In my opinion, budgeting is still crucial. Especially for those who are likely to be swayed by marketing gimmicks and end up buying a TV with 100001 features which they do not need or even know how to operate.

General budgeting also involves knowing where your money is being spent on – this means that it helps you put things into perspective, to know what exactly are you spending money on. Sometimes, you may be surprised by