Irwan’s

In the last post, I talked about gold as the investment of choice in bad economy. After reading an article from investmentu.com, my current understanding is not quite true. Here is the excerpt:

Dr. Jeremy Siegel, a professor of finance at The Wharton School of the University of Pennsylvania and author of Stocks for the Long Run, has done a thorough historical study of the returns of different types of assets over the past couple hundred years.

What he discovered is dramatic:

• $1 invested in gold in 1802 would have been worth $32.84 at the end of 2006.

• The same dollar invested in T-Bills, with interest reinvested, would have grown to $5,061.

• $1 invested in bonds would be worth $18,235.

• And $1 invested in common stocks with dividends reinvested - drum roll, please - is now worth more than $12.7 million.

Read more here

As our market is going through uncertainties both in politic and economic itself, people are flocking to investments that are able to hedge such uncertainties. Many opt for bonds that offer security but less-than-inflation rate of growth. However, there is one vehicle of investments that strive in the time of political and economic struggle. It’s gold.

Before you jump straight into this golden arena, there are few things that you have to know. This guide will ensures that you will be better prepared in Q&A session with your investment advisor.

Question. What kind of gold should I buy?

Answer. Gold comes in many forms. So you have to know which suits you best. First we have bullions or gold coins. In Malaysia, the only bullion coins is Kijang Emas. It’s available through local banks. You can get more info from Maybank page.

If you are not keen to keep the coins by yourself, you can save the hassle by opening gold investment account, like the one offered by Public Bank. This gives peace of mind and reduces unnecessary risk of keeping the real gold in your house.

Q. When should I buy?

A. If you read online articles, they will tell you that it’s always the best time to buy gold. Most probably because those people the ones selling gold. However, it’s quite true but I won’t give you that straight answer. Gold is a limited expensive metal, is not a derivation, have resilient value and rather high liquidity. Besides, the value of gold usually strives when inflation rate increases, currency is having debasement or future economic prospect is in gloom. All of these put gold as a preferred investment when other investment vehicle fail to offer enough confidence to investors.

Q. How much should I buy?

If you would like to have gold as part of your investment, it’s best to consider it as a low risk low return investment. Having said that, I would say 10-30% is a good range when economic is having a good time and you can increase it if you are expecting economic slowdown. That’s it if you are a speculative investors, if not, just do regular investment on gold and you should be fine.

Q. How about gold stock?

A. Gold stock are shares of companies that deal with gold mining, extraction, processing and minting. While it’s closely related to gold, it’s still stock, not precious metal. If the stock rides on the bull market because of gold, you are lucky but it doesn’t offer the same qualities that people seek by investing in gold. So make sure you know what you are doing.

Q. Where can I track daily gold price?

A. Kitco has a good graph of daily gold price movement on their site. Check it out.

Q. Ok, I’m interested, what should I do now?

A. If you are ready to make gold investment, go to nearby bank and ask them about it. You’ll learn a lot more when you already have basic of gold investment.

Good investing

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If you think mutual fund is not enough for you and you want to be more in charge of your investment, guess what is the best for you? Create your own mutual fund.

Seriously, can I do that?

Not legally as you have to get license and whatnots but on personal scale, it’s as easy as buying stocks.

I know you are joking but why would I do that?

The biggest advantage of buying your own fund is that you can evade the enormous 6.5% initial fee and 1.5% annual management fee. Let’s see how the fees eat up your profit.

The diagram uses 6.00% initial fee and 1.5% annual fee. At the end of the 5-th year, you almost lose 33% of your profit to the fees. Scary huh?

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Subprime mortgage was not in my financial vocabulary until last summer, when it shocked global market with unabated effect. Let’s learn more about this crisis.

What is Subprime Mortgage?

Basically it’s a mortgage for people with shaky credit, or specifically, people who is unlikely to be able to pay the mortgage. Usually it’s given to those who are seeking money to finance their houses.

Why banks (lenders) give money to those who can’t pay?

If banks are doing something, they are doing it for money. Dealing with subprime mortgage is a big risk but the interests rate for it is also high. Usually subprime borrowers will have to pay lesser interests rate for the first year and the rate climbs up for the later years. This is the time when borrowers start to have problem paying their monthly payment.

If borrowers can’t pay, won’t the banks loss their money?

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If you has been following our market trend lately, you would notice that our stock market was plummeting down. With just several days, our Composite Index has come down to 1191.55 point from almost touching 1400 point. And with it, almost all of mutual fund were losing value too.

Here we come again to the point of making decision. Are you going to cut loss and retreat from stock market/sell your mutual funds? Or you just take it as one of the dismissible volatility and stick to you buy and hold strategy? Whatever you choice , just don’t panic.

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(Tables were accidentally deleted, I’ll try to remake them soon)

update: Mr KKChow has a better graphic for this

Azwa has posted a question to ask about how Dollar Cost Averaging works. Here two simulation of the averaging effect of regular investment. Basically, the concept of dollar cost averaging is the system buy more units when the price is low and less unit when the price is high.

In High-low-high Market, you started investing at $1.25 and ended at $1.25 too. But with dollar averaging cost effect, you actually have gained 8 cents.

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