How to Diversify Your Investments During Crisis?

AS a result of the financial crisis, even though most commodities have not been performing well, gold has outperformed the conventional asset classes like equity and bond.

This has prompted some investors to consider commodities as one of their investment asset classes. In this article, we will look into how to invest in commodities.

Bruno H. Solnik and Dennis W. McLeavey in their book titled “International Investments” classified commodities in three major categories – agricultural products, energy and metals.

Examples of agricultural products are fibres (wood, cotton), grains (wheat, corn, soybean), food (coffee, cocoa, orange juice) and livestock (cattle, hogs, pork bellies). Energy products can be crude oil, heating oil and natural gas whereas examples of metal products are copper, aluminum, gold, silver and platinum.

The main reason behind investing in commodities is that they have negative correlation with stock and bond returns. This will provide a good way to diversify portfolio risks. Besides, given that commodities are positively co-related to inflation, they can help investors hedge against inflation.

Investors can consider investing directly in commodities or indirectly by buying into futures contracts, bonds indexed on some commodity price as well as stocks of commodity related companies.

Some companies will invest in commodities that are extensively used as raw materials in their production processes. High commodity prices or raw material prices will affect those companies’ performance. However, if they have invested in their raw materials, even though their profitability might be affected by high raw material prices, the gains from their investment in those commodities will offset the losses in their operations.

Some investors will consider buying into commodity futures, such as crude palm oil (CPO) futures as this is one of the easiest and cheapest ways to get exposure to commodities.

However, investors need to understand that futures trading requires a high level of trading skills as most commodity players are well-equipped with the required market information, like total world supply and demand of CPO as well as the weather conditions in those producing countries. Some financial institutions may offer unit trust funds that invest directly in those commodities or indirectly through buying into commodity futures. In the United States, investors can buy into commodities via exchange traded funds (ETF) that are invested in commodities futures.
An ETF is a special type of fund that tracks some market indices and it is traded on a stock market like any common share. Given that the world economy may recover further and oil prices may go beyond US$100 per barrel again, buying into oil or other commodity related ETFs may provide retail investors an alternative to get exposure into commodities.

Since commodity cycles and the general business and stock market cycles are usually different, investing in commodities provides a good way of portfolio diversification.

Besides, investors can consider buying into collateralised futures funds (sometimes they are referred as structured products). A collateralised futures fund is a portfolio that takes a small long position in commodity futures and invests the rest of the money in government securities. Normally, it is capital guaranteed as the yield generated by government securities will be used to cover for the cost incurred for the futures contracts.

Lastly, investors can consider buying into listed companies that are commodity related. In Malaysia, if investors wish to gain from higher CPO prices, they can consider buying into plantation companies.

Given the current gold prices of more than US$1,150 per ounce, some investors are eager to know whether there are any further upsides to the gold prices. Some analysts and fund managers have predicted that the gold prices may go beyond US$1,200 to US$1,300 per ounce. Investors will rush into gold during a financial crisis, like the current financial crunch and the Great Depression in 1929-32, because gold can keep its value during those periods.

We believe that gold is a cyclical product. Even though nobody knows how high the gold prices can go, given that the world economy is showing signs of recovery, the upside potential for gold investing may be limited.

Source: Starbiz

When You Buy a House

When one considers buying into a condominium project, one pays a premium for the higher floors. The view tends to be better as one goes higher, it is cooler and there are less mosquitoes. While there are advantages of buying into a higher floor, this should be balanced with accessibility.

If you have the resources to buy the penthouse, should you not consider the accessibility to get your basement car park or to level ground? The lift is the only way. You are already paying a premium for that unit and you are already compromising by sharing the lifts with everyone who lives below you. Hence, the number of lifts that the project has is very important, especially if you are going to be at the very top.

From the penthouse, we take the lift to the basement car park. Although this may be a strata-titled project – it is gated and guarded – the basement car park can be a security issue. Buyers tend to be enchanted with the show unit with no consideration for the car park.

If the project is already built, check out the basement parking. Does it have a high-ceiling? Is it well-lit and airy? Are there many nooks and corners that allow people to hide in shadows? Are the parking bays large enough or is it a tight squeeze for larger sedan?

It would be a good idea to ask for a copy of the basement car park plan and imagine the route from the lift lobby to your parking bay.

If there are elderly or wheel-chaired family members who will be living in the condominium unit, they will have problems if they have to manoeuver a flight of stairs, or even several steps, to get to the parked car.

This takes us to the importance of a project having a pick-up and drop-off points. Having a nice high-ceiling lobby may be impressive, but is there a large enough area where your family members and friends can collect you or drop you off with no hassle? Or will you have to walk to the security guard house and wait?

Since we are considering the amenities outside the building, something has to be said about landscaping. There was a time when palm trees were very popular. It makes no sense to plant trees which shed their tiny leaves near a pool. However, developers’ enchantment with palms is something that has to be weighed. Developers tend to like palms instead of trees which shed their leaves daily. While palms are easier to maintain as the fronds do not shed weekly and because the fronds come in one piece, they are easily picked up and thrown away.

While some consider them aesthetically pleasing, they are not shady. Some high-rise projects today come with a landscaped park.

It makes no sense to have a one-acre park planted with just palms. It is up to buyers to press developers to have a variety of foliage, and that includes large trees which provide shade, as well as shrubs.

Modified from Starbiz.

What is the Real Value and Use of Gold?

What is the real value of gold? Gold has industrial uses, especially in the electronics industry where it is used for electrical wiring due to its high conductivity. However, close to two-thirds of its demand is for jewellery, particularly in India and China.

Increasingly, it is being used again as a store of wealth as investors lose confidence in paper money, hedge against inflation or worry about economic and political turmoils. Other than buying physical gold, investors can invest in gold exchange traded funds (ETFs). SPDR Gold Trust, the largest gold ETF with a market capitalisation of over US$41bil, holds over 1,100 tonnes of gold.

Money could as well be in the form of sea shells and indeed Pacific islanders used sea shells as money. Before paper money, what constituted money came in many forms – sea shells, salt, leather, copper, silver and gold. Money was used as a store of wealth which could be used to purchase goods and services without resorting to barter trade. It was in the world’s oldest civilisation, Mesopotamia (in modern Iraq), where metal coins were introduced around 2500 BC. Gold is valuable only because it is perceived so in the collective psyche of the human race, hence its value is subjective and relative to other alternatives. To be valuable, something has to be rare and desired.

In all of history, only 161,000 tonnes of gold have been mined, barely enough to fill two Olympic-size swimming pools, according to a January 2009 National Geographic article. To be valuable and used as money, it has to be something durable. That would exclude fair maidens as their perceived value in the eyes of lustful men may diminish with age. Still, without the demand of gold from the fairer sex, its value would be much lower.

In Einstein’s theory of special relativity, time is relative to speed but if we apply the theory of relativity to the perception of value, the relative value of goods and services is determined by comparing the desirability of one versus another just as we compare the relative attractiveness of bonds, real estate, gold and stocks.

Even within the same asset class like stocks, we apply the relative yardstick – should we buy DiGi or Maxis? The relative attractiveness is determined by supply and demand, interest rates, growth and dividends for stocks, personal preferences and many other factors. The fact that the prices of stocks, bonds and commodities quoted on exchanges are so volatile is a reflection of not only genuine supply and demand but also human psychological factors which cause irrational exuberance or pessimism.

The Chinese introduced paper money during the Tang Dynasty (618-907) and with that they also invented hyperinflation when a large amount of paper money was introduced.

How does printing money cause inflation? In a simple hypothetical world where US$100,000 of paper money can only buy you a bar of gold or a house, doubling the paper money to US$200,000 does not create new wealth but merely causes the value of the bar of gold and the house to rise from US$100,000 to US$200,000, an inflation of 100%.

Wealth transfer

Printing of money merely results in a wealth transfer from the saver (who can buy less with paper money) to the government (as it can use the freshly created money) and borrowers (decline in the real value pf debt). Gold is perceived as an inflation hedge and a store of value. (See chart) Its price spiked in the late 1970s when the US and world inflation surged. The price is surging again due to diminishing confidence in paper money.

World governments are all undertaking fiscal stimulus to counter the economic slowdown. These large budget deficits eventually have to be financed by higher taxes but with unemployment in the United States at over 10%, politicians with an eye on getting re-elected may be tempted to print money to finance the budget deficits and bailouts.

Hence it is not surprising that with the United States, British and Japanese governments printing money, investors are flocking to buy gold or commodities which are a better store of value as their supply does not grow as fast as printed paper money.

The printing of money by the US government also puts other currencies at risk as over 60% of foreign reserves are held in US dollars. As the gold standard has been abolished, paper money cannot be converted to gold. No wonder the Indian government has decided to sell some of their US dollar reserves for gold. Perhaps the currencies of larger countries like Australia are relatively safer as they are sitting on large yet-to-be-mined gold reserves even as their US dollar reserves lose value.

So, should the fair price of gold be relative to paper money? Though the value of gold may be subjective in the minds of investors, the reality is that the amount of gold in the world is finite, but there is no limit to the quantity of paper currency which can be issued.

Therefore it is not surprising that the value of gold is at a record high as more money is being printed. All this is premised on the assumption that we will continue to treasure gold, which is likely to be the case as we have done so for millennia.

Source from StarBiz.

How Much Money You'd Need to Quit Your Job?

How much money do you actually need to take this job and shove it?

Go on, admit it: You've thought about it. Maybe you've imagined quitting your job and easing into early or semi-retirement -- or starting your own business.
It's a perennial topic, but it's especially timely now. Millions are either unemployed or working part-time. Millions more fear their job could be next.

Obviously there are a legion of complicating factors involved in anyone's decision. Sherrill St. Germain, a financial planner in Hollis, N.H. with a lot experience in the field, says the big issue for many clients is losing group health insurance. "That's the thing that keeps them stuck," she says. "That's the deal-breaker." Say what you will about healthcare reform: The present system is a huge drag on economic mobility and entrepreneurship.

But even if you can surmount all the other complications involved in escaping your current situation, how much money would you need to have saved up to make it a viable idea?
Most financial planners have advice on the subject, but Troy Thompson's is as good a place to start as any, because it comes from experience. He left his job as a lawyer at a large firm in San Francisco to start out on his own as an independent financial planner in Portland, Ore.

"What's the cash in your pocket that you need to check out of the rat race?" Mr. Thompson asks. "I decided I had to have two years' worth of (living) costs...in very liquid, easily accessible assets." He figured he had to cover a lot of transition costs. That included moving expenses, legacy costs (like the remainder of his lease in his old home), and enough money to support his expenses while he changed careers and ramped up his new business. Saving up to two years' worth of costs may sound daunting. But here's the good news: If you are making this kind of move, you are probably moving from a high-cost part of the country, like San Francisco or New York, to one of the cheaper ones. And your money will go a lot further there.
A dollar may go twice as far in Austin, Texas or Portland as in Manhattan. Those wondering where they can live for nearly nothing should take a look at Bankrate.com's cost of living calculator (It's based on the widely-followed Accra Cost of Living Index data). Obviously everyone's numbers are different. Here are some other questions to consider:

What kind of escape are you planning (or dreaming about)? Are you just going to change jobs or are you planning to change careers? Or are you really wondering if you can check out– take early retirement, or maybe semi-retirement? The money you'll need is going to be completely different for each one. Ms. St. Germain gives clients some scenarios: A mid-level military man happy to live on his pension while searching for a new job may not need anything. A highly-paid executive who wants to downshift to a lower-paid job may need a lot to help supplement her transition and future income. Net result: Your "escape fund," as Ms. St. Germain calls it, can be anywhere from zero to a large pile of cash to supplement your income indefinitely.
How far will your savings get you over the long term? Someone investing their savings conservatively should certainly be able to earn about 3% a year over inflation. If you want to withdraw $10,000 a year and make it last for, say, thirty years, you will probably need to have about $200,000, or twenty times as much, saved up now. Anyone giving serious thought to the idea of escaping is going to need to take a hard look at their expenses. "It's all a game of cash flow, in or out," says Mitchell Reiner, a financial planner in Atlanta. One of his clients, a senior executive in Atlanta, recently managed his escape: He and his wife threw in their expensive lifestyle and took early retirement to the mountains. But they axed their monthly expenses in half, from $7,000 to $3,500.

The biggest saving was simply on real estate: Mortgage, property taxes, insurance and other expenses. They sold their expensive home and moved somewhere cheap.

What can you live without? It's a truism but worth repeating: Most middle-class household budgets can be cut. The most common advice is to look at your current expenditures and see where you can pare back. But if you really want to escape, the more radical idea is zero-based accounting: Start with a blank piece of paper, and see what you would need to spend to be comfortable.

"The problem with people nowadays is that a 'necessity' is any luxury your neighbor happens to have," jokes Ernie Zelinski, a frugal living guru and author of "The Joy of Not Working and How To Retire Happy Wild and Free." He adds, "We can all live on less than you think."
You might not want to go as far as Mr. Zelinski–"I don't own a cellphone, I drive a '95 Camry, and for two years I lived without a sofa," he says–but the principles he espouses aren't crazy. "You're financially independent if you have $15,000 coming in and $14,900 going out," he says.

How much do you need to be free? Maybe you should ask instead: How much do you really want to be free?

Source from The Wall Street Journal

The Leverage Factor in Property Investments

Is property a good investment? Many are likely to respond with a resounding “YES!”

In fact, if you were to ask anyone who had suffered equity losses, they would most certainly reply that they wished they had bought one more condominium unit in Mont Kiara or taken up the beautiful service-apartment in KLCC two years ago. For many Malaysians, property investing is not a new thing. There are people who would rather buy a property than put their money in other investments. And some wealthy individuals have even come together to develop small-scale property projects.

Properties seem to be keeping up in terms of value, especially if you have the holding power and the location is good. And more importantly, a property is tangible – you can look, touch and even smell them literally.

Why is property investing such an investor’s darling? Many die-hard property investors would say that they make money and receive rental income through their property. So investing in a property does indeed sound like a good buy.

However setting aside the benefits, there is one thing that many are generally unclear about: property investing comes with significant leverage benefit – that is, buying a property that is worth a lot more than what is paid at the onset. Most of the time, a property investor does not have to pay 100% of the property price because one would take a property loan from a bank. For example, if you take a loan with a margin of 80%, a RM1mil house would actually cost you RM200,000 upfront. The remaining 80% is paid off through regular mortgage payments.

On average, a property loan lasts for about seven to eight years, even though the legal tenor is 20 or 30 years. It is conceivable that a few things may happen within these seven to eight years, for example, the buyer of the property sells the property, or reduces his loan liability through pre-payment.

Using the previous example, let us assume that the price of the property has increased to RM1.2mil in three years. The total investment cost is the initial investment of RM200,000 plus other fixed costs. So the gross profit is RM200,000, or 100% based on the initial upfront payment. Of course, the net profit will be lower, depending on the fixed costs incurred for mortgage interest, legal costs, et cetera.

It is not uncommon for very serious property investors (and speculators) to pay only 10% upfront and take out a loan for the remaining amount. At 10%, the leverage is ten times! This means that if you make a 10% profit on the property value, the leverage would equate to ten multiply by 10% or a total of 100%, before deducting the cost of borrowing. The converse is true, if you have to sell your property at a 10% loss in value, you may not recover enough from the sales proceeds to pay off your outstanding loans. In such cases, you would have effectively lost your initial upfront investments plus all the associated costs.

One of the true dangers in using leverage is linked to the cashflow level of the investor. If you are financially strong, you can continue to hold on to the property even during the downturn. And if there is good rental income, you can further sustain the mortgage repayment. However, if you cannot repay the mortgage, the risk is possibly foreclosure. The United States is a good example where many mortgagees could not afford to service their loans as interest rates rose. Creditors had to foreclose and force-sell properties to recover the outstanding loans.

When dabbling in property investing, it is noteworthy to understand and take note of the leverage factor or loans taken up. The effects are not very different from margin investment. A quick reflection on past market turmoils like the 1997-1998 crisis will enable one to immediately understand that leverage cuts both ways – magnifying the profits and losses.

After all, property investing, like any form of investment, can be profitable and carry risks at the same time.

So before you jump into purchasing your next property, do bear in mind this leverage effect.

Source: Starbiz.