Last time I mentioned the need to diversify when you invest money. Many people either wonder "why diversify?" and they don't do it, or they don't even think about it. Why do you need to diversify? To eliminate unnecessary risk.
The old saying "don't put all your eggs in one basket," is a very wise and true one. You could put all your eggs in one basket if you think it's strong, but if you're wrong and it breaks, then you'll lose everything. Put them in two baskets and you'll be less likely to lose them all? Yes, you're more likely to lose some eggs, but it's better than losing them all, right?
Diversifying your investments work in the same way. There are two types of risk associated with investments.
Unsystematic (or diversifiable) risk is the risk a particular company/share has of losing (or gaining) value. An example of unsystematic risk in coca-cola shares is the CEO could die, or a survey coming out claiming drinking coke shortens your lifespan by 20 years.
These events will cause coca-cola shares to lose value, but it wont effect the value of any other shares (except maybe pepsi ;)
This kind of risk can be diversified away by investing in multiple companies/shares. The less related the companies, the better the diversification. An example would be investing in coca-cola and microsoft shares.
Systematic (or undiversifiable) risk is the risk you face for investing in the share market itself. This risk causes all shares to lose (or gain value). An example of systematic risk is the current credit crisis. This is making people sell their shares and since there's no one buying, the shares lose value.
You cannot diversify this risk away since all shares are affected by these events.
I will add a chart later to show how diversification can reduce your total risk to a degree. But I hope I've shed some light on why it's important to diversify your investments. While it's great that people want to invest and even get together in groups to decide what to invest in every month or so, it's saddening that these people are taking more risks than they need to be..
Wednesday, February 20, 2008
Sunday, February 17, 2008
investing in the share market
some people wonder how they should invest in the share market. Is now a good time since the price has dropped? Which companies should I invest in? How much should I invest?
Compared to other investments (like a bank deposit), share prices are more volatile. The price which they are worth can move up and down many times during a week, depending on the markets and internal company issues (compared to a bank account which goes up slowly every month).
The good news is that the average return is higher than a bank account since you are taking more risk. So in the long term, investing in shares is a good idea.
If you want to try and take on the share market yourself, I recommend you having at least $25,000. Yes, that's a shit load of money, but you need to diversify to cut down on unnecessary risk (unsystematic risk).
Most people reading this will not have that much, so it is better to buy into a managed fund. This is where many investors pool their money together and buy a basket of shares (decided by the fund manager).
My suggestion if you have $1500 is to get smartshares (you can find out about it at nzx.com). The funds there track an index so the fees are relatively low. They also offer a regular savings scheme which allows you to put in a certain amount (by direct debit) into the fund per month. This can be as low as $50 and is a way of doing dollar cost averaging.
Remember if you don't know what you're doing, you should invest in share for the long term. 10 years should be your minimum but the longer the better.
You can always email me if you have questions...
Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.
Compared to other investments (like a bank deposit), share prices are more volatile. The price which they are worth can move up and down many times during a week, depending on the markets and internal company issues (compared to a bank account which goes up slowly every month).
The good news is that the average return is higher than a bank account since you are taking more risk. So in the long term, investing in shares is a good idea.
If you want to try and take on the share market yourself, I recommend you having at least $25,000. Yes, that's a shit load of money, but you need to diversify to cut down on unnecessary risk (unsystematic risk).
Most people reading this will not have that much, so it is better to buy into a managed fund. This is where many investors pool their money together and buy a basket of shares (decided by the fund manager).
My suggestion if you have $1500 is to get smartshares (you can find out about it at nzx.com). The funds there track an index so the fees are relatively low. They also offer a regular savings scheme which allows you to put in a certain amount (by direct debit) into the fund per month. This can be as low as $50 and is a way of doing dollar cost averaging.
Remember if you don't know what you're doing, you should invest in share for the long term. 10 years should be your minimum but the longer the better.
You can always email me if you have questions...
Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.
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