IN this money-driven world, the need to invest is absolutely undeniable.
The unstable economy combined with rising inflation and the implementation of the goods and services tax is affecting our cost of living in unpredictable ways. At this rate, if we do not invest, we run the risk of having to work our entire lives.
Investing allows us an opportunity to grow our wealth at compounded rates, thus multiplying our money within a shorter period of time. Take a look at the multi-billionaires of today – they did not exactly make their wealth by earning monthly paycheques.
Nevertheless, when we invest, we also inadvertently expose ourselves to the risk of making investment losses. These cases are not unheard of. We’ve all come by stories of investments that are deemed to be “perfectly good” by analysts and salespersons, only to drop like rocks, costing investors their capital or worse, their entire life savings.
Take for example, the unexpected collapse of financial juggernaut Lehman Brothers which eventually pulled the entire global economy into a tailspin; or the notorious Madoff ponzi scheme that left investors wary of even the most reputable and well-regulated institutions; or the 2007-2008 financial crisis which caused unit trust funds to lose 30%-40% of their value.
More recently, the investors of oil and gas stocks were hit badly by the recent crude oil downturn, causing them to lose up to 50% of their capital. The list goes on and on.
Alas, investment misfortunes are not limited to just stocks and unit trusts.
In the case of gold investment company, Geneva Malaysia Sdn Bhd, some 1,065 gold investors are presently embroiled in a lawsuit with the company for breach of contract involving RM146mil in gold products and monies owed to them.
You may have also heard of stories of property investors aiming to make a quick buck by flipping properties, only to be caught off-guard by not being able to rent or sell the properties for profit as planned.
Even the most experienced investors are not completely “bullet proof” from committing investment blunders.
By his own admission, Warren Buffett, the greatest investor of our time, shared in an open letter to his investors, two of his biggest business and investment mistakes, one of which he claims cost him and his investors US$100bil when he bought ailing Berkshire Hathaway. He called the actions that led up to his purchase of Berkshire a “monumentally stupid decision.”
In order to learn from these investment mistakes, we must first understand the risks and rewards of investing well.
The simple science of investing dictates that you are essentially aiming for maximisation of your return of investment (ROI). As such, in a best case scenario, investing will increase your net worth significantly and substantially. This is perfect, if you have done all the right things and had picked a winner.
However, what if the reverse happens? Depending on the size of the capital invested, you could suffer a major loss to your net worth and be further away from achieving financial freedom. Chart 1 illustrates the best and worst-case scenario when you invest money.
In a worst-case scenario, your net worth would be severely depleted should your investments fail to perform.
In short, growing net worth through investing is risky and uncertain. If you continue down this beaten path, you may risk losing all your hard-earned cash which has taken you years to accumulate. Can you afford to take such risks?
So, what then?
We all know that with all kinds of investments, there is an element of risk. Let me pose you with a question here: If you were given an opportunity to increase your wealth and achieve financial freedom, would you rather take a path with higher risks, or minimised risks?
Only but a few handful of savvy investors know this. There is, the availability of a new and safer approach to invest using money optimisation as a strategy.
A new way to invest: Money optimisation
When you choose to grow your money via the money optimisation route, your goal is no longer focused only on ROI, but on net worth optimisation.
As you can see from Chart 2, when you take the path to optimise money, even in the worst scenario, your net worth would still grow and not be depleted. It will still be sufficient to help you achieve financial freedom.
Put it this way: when you play a fully offensive strategy soccer game with no attention to defence, you’re left vulnerable to counter-attacks. This is investment in its raw sense.
Meanwhile, money optimisation would be akin to leading your squad with a healthy balance of both attack and defence in mind, with a strategy that covers all bases so that you are not left defenceless when things go awry.
In short, money optimisation increases your certainty to grow your net worth.
How is this done?
The bottom-line difference between investing and optimising your money is the management of risk exposure.
Money optimisation is a carefully planned method of investing in a way that protects you from having to face severe losses of your capital, as you take into consideration 8 areas of your personal finance in a holistic manner and capitalise on the available opportunities to increase your net worth.
These eight focus areas are:
> Investment planning
> Risk management and insurance
> Education planning
> Retirement planning
> Asset protection
> Estate planning
> Debt and loan management
> Tax planning
Over time, your net worth is certain to grow to an optimum point while your risk exposure is minimised.
The unknown and uncertain can be quite frightening with the sea of investing options available today. A bigger reason for not delving into investments for many are the stories of failures and loss associated with a doomed investment.
It is important to understand that there is no such thing as a truly risk-free investment - different investments carry different types and levels of risk.
That being said, investing is still essential to getting where you want to be financially. You can’t afford not to invest your money. Therefore, the key to successful investing in this current turbulent word is money optimisation, i.e. the method to invest with minimum risk to achieve greater growth certainty.
To quote the famous Sun Tzu, in his seminal book The Art of War, “Victorious warriors seek to win first and then go to war, while defeated warriors go to war first and then seek to win.”
Now that you understand the difference between investing and optimising money, does it make sense for you to take unnecessary risks?
- Yap Ming Hui (firstname.lastname@example.org) is a best-selling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000.
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