Why take the risk?

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..

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.

What? An update?

haha, i got outplayed at poker today which made me placed 4th instead of higher in a sit 'n go. The short stack with 1700 raised from the small blind from 100 to 200. Me (with A 10 offsuit) and another called. The flop was 4s 7h 10d. The small blind check. I decided to put him all in leaving me with 600 in chips. The other folded. He called and showed a set of 10's and I was virtually out (the blinds went up to 100/200 after that).

Nice hand. It will haunt me for a while..

In better news, I'm once again first in the poker league with my friends. I was head to head with about 700 in chips when the blinds were 50/100. My nemesis was the big stack with about 4k. My 3 all ins where I managed to beat him were:

1) My Jd10d vs his AKoffsuit (all in preflop, rivered a flush)

2) After the flop of 6 8 9, I went all in with 7 K. Nemesis called with 2 pair (8 9). (I rivered a 5)

3) All in preflop. My Kc 9c against his A 7 offsuit. (I rivered a straight)

So as you can see I outplayed him all the way and deserved the win (and to reclaim top position). Arsenal will also hold top position this week with a 1-0 win against Chelsea. How can Chelsea score without Drogba and Essien?

It's Finished!!

I finally got my ass into gear and finished the finance newsletter I've been writing. Hopefully it can take off, but I need You to read it! As an incentive, I'm offering $25  NZ bank accounts to people who read it and tell me what they think (for the first 15ppl). If you want to read it, email me (it's on my profile page), and I'll send it to you. After, please tell me what you think, and if you like it, forward it to others.

In other news, I was at work today and I swear customers wait for good songs to play before telling me to get shoes. I have to listen to the same boring  songs all day, and miss the ones I actually like because I have to go out the back... I recall hearing three songs twice today. I have to go all day tomorrow too so I'm going to go insane..

Merry Easter everyone.

update

Hi. My attempt at polyphasic sleep has been postponed till saturday...on friday I'm working from 9-9, so it would mean I'd have to sleep for 20mins three times! It wouldn't go over well. So instead, I'll put a video here worth watching...but I only have 50mb to last all tomorrow, so I'll delay that too.

Instead, pay a visit to this. If you know Rich Dad, Poor Dad, you should definitely read the criticism of him. Or go back through my archives and find the link to "What is Man," by Mark Twain. That is something I'd recommend to anyone for summer (or winter) reading...

Stay tuned for the polyphasic sleep diary. Coming soon...

34 sleeps till Christmas

Hi everyone. Has everyone noticed all the Christmas decorations out in the shops, to entice you to spend more? Some places have actually had them up since the start of november, which is crazy. Is Christmas a holiday which deserves 2months out of every year? If you include the mid-year Christmas celebration, it goes up to 3months.

Yes, it's a perfect opportunity to see your family/friends, and do idiotic things (which is also what new years is for). But has it become too commercialized? Do you feel you have an obligation to get a gift for people close to you? Like your parents? Your siblings? Your close friends? If you do, then maybe you should think about saying to them "all I want from you is a hug, and that's my present to you," How do you think they'll react? It's hard to say...

Anyway, tonight is my last proper monophasic sleep. From tomorrow, I will start to experiment with polyphasic sleep starting tomorrow. This will also be where I keep a journal of how it goes. I'll have plenty of time with only 2 hours sleep a day. Stay tuned...

Quote of the day

Women don't belong in the workplace. Their menstruation attracts bears. That puts everyone in jeopardy: Ron Burgundy

Sorry for not writing in this for a while..exams and all. Only one semester (including summer school blah!) to go!! That's only 12 (+6argh!!) weeks! Then I'll be rolling in the cash! (but probably not..)