I used to write a post regarding Trump and Kim Jun Un more than half year ago. Despite I did not hold positive impression on the two but neither did I have negative comment on them. The recent development and the Trump-Kim(or Kim-Trump if you like) summit demonstrates my view on the two are correct.
Among some seem to be inappropriate administrative orders like the latest custody of the illegal immigrant families with children and parents apart, Trump was bold enough to do things his predecessors, both Republican or Democrat, dared not to do. He really shook the world and casted a new atmosphere in the global affairs.
Yet I am by no means his fan but just trying to be neutral on commenting what he has done, to America and the world. His slogan in his presidential election campaign was America Great Again. In a certain extent, America does stand firmer than it did in most of the international affairs. Whether these measures are correct or not depend on one's standpoint though. One big thing he did it right is that he sees through what mistakes the past administrations made and is bold enough to rectify them, one by one.
Again when I said he did it right is purely from the stand point of an American president whose role is to maximize the interests of the America despite it might at the expense of the other nations. When there is only the choice of a lesser evil devil then he really made a right decision indeed.
His latest controversial action is inevitably the trade war against China and even the U.S.'s allies. It seems he puts the Country against most economies but when trade deficit is mounting and increasing year over year. In America's perspective something must be done to reduce, if not eliminate, it. In fact trade deficit is only a name but he is defending the America's world technological advancement, financial dominance, military leadership and last but not least the U.S. dollar empire. These are the things that he, being an American president, must do yet his predecessors did not. Now he is doing it. Bravo! Donald! Having said so, don't get me wrong that I agree on what he did but I just admire Trump whom is willing to do the dirty jobs that his predecessors failed to.
Kim is another miracle maker. No more than half year ago the North Korea was still an evil nation with all bad names on it but just one summit Kim turned it around. Trump once said Xi Jin Ping is a poker master but if it is not just a compliment then Trump must has overlooked this chubby young man. In my previous post I already commented that Kim is smart to develop the nuclear deterrence to protect his nation (of course his ruling as well). Had he not has nuclear weapons in hand I don't think Trump would spare a second to meet with him. However, more amazingly Kim not only uses nuclear weapons to protect but also to occupy the center of the stage of world affairs. Not only caught billions of eyes on the Summit but Kim will remain an influential person on the topic along the path of denuclearization for quite some time. One will not be surprised to hear his name again and again in the news broadcast.
Kim is also so smart to leverage his influence by partnering with the super powers. By staying close to the U.S. he can demand more aid from China. The frequent visit to Beijing maximizes his bargaining power against the U.S. and having good relationship with Russia is a very good backup card. Kim plays so well among these powers and each of them want so bad to be able to be the boss of this small nation. Who gains most? You bet!
Trump and Kim enlighten the dull world order with a fresh touch. The world affairs became a bit of stagnant in this decade without much changes except the Brexit which once stirred the world in a certain extent but as the process runs into the routine path on operations then the world has lost interest on it already.
I am sure the lovely duo will brighten our eyes with more surprises to come. I also expect their new movements will finally set a new world order too.
2018年6月21日 星期四
Index option trading with statistic
It was said that, for amateur players, option trading is the fairest game especially in the derivative products because the trader can choose the risk exposure by themselves and the prices are offered by a few market markers so it is comparatively fairer than warrant trading or CBBC.
There are many underlying assets for option trading in the U.S. market but in the local context, stock option and index option are the two mostly traded products. Despite the two have a common point that they are related to local stock market but indeed since their respective underlying assets are different so the trading skill sets and trading mindset differs from each other as well.
Personally I prefer index option trading because the analysis on it is a bit simpler than the counterpart as there are almost 70 stocks available for option trading but just two index option products, ie., the HSI and HSCEI only. To trade the index option, one just needs to have an view point on at what point the settlement point will be at the end of a particular month.
There are many strategies in option trading but they are just derived from the four basic orders, ie., long call, short call, long put and short put. A simplified job of an option trading player is that one must forecast the direction of the market, the volatility of the month and finally and most importantly is the settlement point at the end of the month. To me, simpler the better so I prefer just to play at the short side to receive premium and the relevant risk.
Being a short side player, what I need to do is just to place order with the strike higher/lower (for call/put) than the expected settlement point then I am safe. However it is easier said than done to decide that particular strike so I resort to statistic on estimating where the safe strike lies.
For any one who knows about statistics must have heard about the binomial distribution and the bell shape curve. All the outcomes of an event are bounded to be covered under the curve and the chance of the happening of a particular outcome is governed by its probability. A safe strike should be the one with low probability. Say by selecting a strike with 0.10 probability meaning the maximum chance I shall lose is 10% only. Of course lowest possible is best but a too OTM strike means very low premium will be rewarded so a trade off is to pick the not too OTM yet with a probability and the associated risk that one can afford.
One may wonder how to figure out the probability of a particular strike. Well, no valuable thing comes without paying effort in this world so one have to build a database to do this job. I have built my own database covering the last 18 years, ie., 216 months, for data-mining purpose. The possible ways of data-mining are only limited to one's imagination. I mainly use it to forecast the possible monthly volatility/closing point and to backtest the trading strategies though. I am going to explain a little bit how it works in my next post.
There are many underlying assets for option trading in the U.S. market but in the local context, stock option and index option are the two mostly traded products. Despite the two have a common point that they are related to local stock market but indeed since their respective underlying assets are different so the trading skill sets and trading mindset differs from each other as well.
Personally I prefer index option trading because the analysis on it is a bit simpler than the counterpart as there are almost 70 stocks available for option trading but just two index option products, ie., the HSI and HSCEI only. To trade the index option, one just needs to have an view point on at what point the settlement point will be at the end of a particular month.
There are many strategies in option trading but they are just derived from the four basic orders, ie., long call, short call, long put and short put. A simplified job of an option trading player is that one must forecast the direction of the market, the volatility of the month and finally and most importantly is the settlement point at the end of the month. To me, simpler the better so I prefer just to play at the short side to receive premium and the relevant risk.
Being a short side player, what I need to do is just to place order with the strike higher/lower (for call/put) than the expected settlement point then I am safe. However it is easier said than done to decide that particular strike so I resort to statistic on estimating where the safe strike lies.
For any one who knows about statistics must have heard about the binomial distribution and the bell shape curve. All the outcomes of an event are bounded to be covered under the curve and the chance of the happening of a particular outcome is governed by its probability. A safe strike should be the one with low probability. Say by selecting a strike with 0.10 probability meaning the maximum chance I shall lose is 10% only. Of course lowest possible is best but a too OTM strike means very low premium will be rewarded so a trade off is to pick the not too OTM yet with a probability and the associated risk that one can afford.
One may wonder how to figure out the probability of a particular strike. Well, no valuable thing comes without paying effort in this world so one have to build a database to do this job. I have built my own database covering the last 18 years, ie., 216 months, for data-mining purpose. The possible ways of data-mining are only limited to one's imagination. I mainly use it to forecast the possible monthly volatility/closing point and to backtest the trading strategies though. I am going to explain a little bit how it works in my next post.
2018年4月10日 星期二
Is stupidity a sin?
In my earlier post, I wonder why nowadays there were still people fell into the trap of the phone scam. I finally attributed that the victims are damn stupid.
Apparently I show no mercy at those victims and I appear to be cold-blooded. Or do I?
I always say there are three kinds of people whom are most easily prone to be scammed, they are stupid, or greedy and not only stupid but also greedy ones. It is unnecessary to explain why greedy people are prone to be scammed because greed hinders their analytical ability. Stupid people actually falls into two main categories. There are people whom suffer from deceases which undermine their intelligence. They are the truly unfortunate people whom deserve kind understanding. However, there are also people born with normal brain function yet became stupid.
Except those gifted people, most folks' IQ are more or less the same when born. These average children received more or less the same education and the majority of them gone through the more or less similar upbringing situation in the view point of statistics. Yet people start to exhibit different levels of intelligence when it comes to how they perceive and react to their surroundings. Such differences differentiates whom are more resistant to scam and whom are not.
Naturally smart people are not prone to be scammed but why are they smart in the first place? I do believe people whom are keen in learning will become smart guys. Learning is not limited to studying and in fact learning is a state of self-imposed requirement on one's self. So a PhD is not necessarily smart but just knowledgeable in a specific area. Generally speaking, keen on studying and reading can accumulate knowledge though. Knowledge, when up to a certain width and depth, compounded with constant questioning and analysis, do transform into wisdom. That tells between smart and stupid.
Most stupids were not born stupid but as a result of laziness. The laziness not to keep learning after school (or even in the school?). In this ever changing world, the knowledge learned from universities are already an obsolete one. Only constant learning keeps one in line with the pace of the current world development. Let's say after graduation one has learned the knowledge and skills 1-10. Ten, twenty years later knowledge 1-5 have become obsolete while new knowledge 11-20 were developed. However, due to laziness he/she did not upgrade so only knowledge 6-10 still have market value but that person does not has knowledge 11-20 so he/she appears to be stupid despite his/her intelligence does not deteriorate. Without updating one's own system, lazy people became stupid. So is stupidity a sin? I do think so.
Apparently I show no mercy at those victims and I appear to be cold-blooded. Or do I?
I always say there are three kinds of people whom are most easily prone to be scammed, they are stupid, or greedy and not only stupid but also greedy ones. It is unnecessary to explain why greedy people are prone to be scammed because greed hinders their analytical ability. Stupid people actually falls into two main categories. There are people whom suffer from deceases which undermine their intelligence. They are the truly unfortunate people whom deserve kind understanding. However, there are also people born with normal brain function yet became stupid.
Except those gifted people, most folks' IQ are more or less the same when born. These average children received more or less the same education and the majority of them gone through the more or less similar upbringing situation in the view point of statistics. Yet people start to exhibit different levels of intelligence when it comes to how they perceive and react to their surroundings. Such differences differentiates whom are more resistant to scam and whom are not.
Naturally smart people are not prone to be scammed but why are they smart in the first place? I do believe people whom are keen in learning will become smart guys. Learning is not limited to studying and in fact learning is a state of self-imposed requirement on one's self. So a PhD is not necessarily smart but just knowledgeable in a specific area. Generally speaking, keen on studying and reading can accumulate knowledge though. Knowledge, when up to a certain width and depth, compounded with constant questioning and analysis, do transform into wisdom. That tells between smart and stupid.
Most stupids were not born stupid but as a result of laziness. The laziness not to keep learning after school (or even in the school?). In this ever changing world, the knowledge learned from universities are already an obsolete one. Only constant learning keeps one in line with the pace of the current world development. Let's say after graduation one has learned the knowledge and skills 1-10. Ten, twenty years later knowledge 1-5 have become obsolete while new knowledge 11-20 were developed. However, due to laziness he/she did not upgrade so only knowledge 6-10 still have market value but that person does not has knowledge 11-20 so he/she appears to be stupid despite his/her intelligence does not deteriorate. Without updating one's own system, lazy people became stupid. So is stupidity a sin? I do think so.
2018年3月29日 星期四
You use Facebook? or Facebook uses you?
Despite Facebook's popularity is dropping nowadays, especially among the younger generations like teens, it is still the biggest social media platform. Many people clock in wherever and whenever they do something.
Posting photos in FB was once seen as a very "in" thing to do. However, despite I also have a FB account but I have never done that. In my first post in this blog I have made it very clear that I do not want to leave any trace of my personal particular in the Internet. It is not difficult to understand why I have never put any photo in my FB account. In fact, the only purpose setting an account in FB was to re-connect with those long lost acquaintance if they happen to find my account. Indeed that is the very first objective that Zuckerberg found FB.
Don't know since when FB became what it is now. It turned into a marketing platform more than is a social media. Not only there are corporate accounts but even many of the individual accounts are catered for marketing on the account holders themselves or the merchandises behind them. So not only I am not active in checking my account nor do I care what happened on the other accounts. I am not a fan of FB at all.
The other reason I don't like FB is because FB has gradually became a greedy company which exploits the big data it has. The big data that has been developing by the mass account holders whom posting text or images in their own accounts. These posts and images form a gold mine because it is exactly the big data that is most sought after nowadays. FB naturally taps on this gold mine and exploits most of out it. However, actually these posts and images are the properties of all the account holders. FB does not own them but it is making huge profit from manipulating the big data deriving from these posts and images. So when people think they are using FB but do they really think who is using who?
I remember someone has once said the best business model is the one with light asset, no inventory and no own production because that means no need to lock up capital on the investment on the assets, no need to worry about the depreciation on inventory and no need to worry about the production capacity. FB just provide a platform for its account holders to post the content which FB is not producing nor is there any inventory that FB needs to hold so FB is exactly this type of business model so despite it is not a good place for me but perhaps it could be a good investment.
Posting photos in FB was once seen as a very "in" thing to do. However, despite I also have a FB account but I have never done that. In my first post in this blog I have made it very clear that I do not want to leave any trace of my personal particular in the Internet. It is not difficult to understand why I have never put any photo in my FB account. In fact, the only purpose setting an account in FB was to re-connect with those long lost acquaintance if they happen to find my account. Indeed that is the very first objective that Zuckerberg found FB.
Don't know since when FB became what it is now. It turned into a marketing platform more than is a social media. Not only there are corporate accounts but even many of the individual accounts are catered for marketing on the account holders themselves or the merchandises behind them. So not only I am not active in checking my account nor do I care what happened on the other accounts. I am not a fan of FB at all.
The other reason I don't like FB is because FB has gradually became a greedy company which exploits the big data it has. The big data that has been developing by the mass account holders whom posting text or images in their own accounts. These posts and images form a gold mine because it is exactly the big data that is most sought after nowadays. FB naturally taps on this gold mine and exploits most of out it. However, actually these posts and images are the properties of all the account holders. FB does not own them but it is making huge profit from manipulating the big data deriving from these posts and images. So when people think they are using FB but do they really think who is using who?
I remember someone has once said the best business model is the one with light asset, no inventory and no own production because that means no need to lock up capital on the investment on the assets, no need to worry about the depreciation on inventory and no need to worry about the production capacity. FB just provide a platform for its account holders to post the content which FB is not producing nor is there any inventory that FB needs to hold so FB is exactly this type of business model so despite it is not a good place for me but perhaps it could be a good investment.
2018年3月19日 星期一
The way I see Bitcoin
Along with the Bitcoin price fluctuation, recently there are increasing noises about this controversial financial product. Many bloggers have made comment on Bitcoin and they mostly focused on whether Bitcoin is a bubble or whether there is any value of investing on it. Most bloggers analyzed Bitcoin on it functionality against the legal tenders like the trading function, value storage function ...etc. However, they all overlooked or neglected one fundamental that why on earth crytocurrencies exist in the world. None of them talked about this very underlying element.
While bloggers commented the nature and future of the Bitcoin, many other readers raised their opinion about it. Some said Bitcoin attributed to the waste of electricity and even deteriorating climate due to globe warming resulting from the power consumption spent on Bitcoin mining. Their comment are all partly reasoned. Nonetheless, a view from another angle perhaps can enable us to see this topic better.
Every economic activity exists for a reason. Only when it meets a need then it can last or even thrives. No rational one will ever engage his valuable resources in mining Bitcoin if there is no market need. So what is this market need indeed?
To answer this question, we can find the clue on the centre point of the Bitcoin, ie., it is a product of block chain technology which has a decentralization characteristic. There is no centralized clearing house of each Bitcoin transaction. That is the beauty of Bitcoin, at least to some groups of people, because transactions are not monitored by the governments around the world. Who likes this most? Of course the underground economy like terrorists, drug traffickers, smuggling syndicates ...etc. Prior to the age of Bitcoin, they have to launder their profit by money-laundering which is troublesome and risky. Now life is much easier for those groups at lease in realizing the profit from underground economy to the surfaced one.
So Bitcoin is a lubricant to the crime? Well perhaps criminals are the groups that can capitalize on the beauty of Bitcoin most but they are not the only beneficiaries. Any individual whom has the need to transmit money across borders is one of the examples. In fact what crime money is indeed is a controversy per se. Firearm trade in Hong Kong is of course a crime but it is legal in the America. Casino is forbidden in Hong Kong but they thrive in Macau. There is too much grey area between crime money and its counterpart. After all, Bitcoin is only a intermedia just like a knife is a productive tool to a butcher but a deadly weapon to a psycho.
Some said Bitcoin is a bubble which will vanish just like the tulip bubble did. Well, as long as it keeps meeting the need of some interested groups, I don't see it will die out. Yet whether one should join the bandwagon, it is totally one's assessment. No doubt there is a quite obvious tendency of price manipulation because the Bitcoin holding concentrates in the hands of a few players whom can drive the price in either direction. What makes it even complicated is that the Wall Street is stepping in this once alienated financial product by operating futures for Bitcoin. Higher volatility in the future is unavoidable and the price call will gradually shift from the existing big players to the Wall Street. When Wall Street tasted the blood of Bitcoin then it is unlikely that it will let Bitcoin dies out.
While bloggers commented the nature and future of the Bitcoin, many other readers raised their opinion about it. Some said Bitcoin attributed to the waste of electricity and even deteriorating climate due to globe warming resulting from the power consumption spent on Bitcoin mining. Their comment are all partly reasoned. Nonetheless, a view from another angle perhaps can enable us to see this topic better.
Every economic activity exists for a reason. Only when it meets a need then it can last or even thrives. No rational one will ever engage his valuable resources in mining Bitcoin if there is no market need. So what is this market need indeed?
To answer this question, we can find the clue on the centre point of the Bitcoin, ie., it is a product of block chain technology which has a decentralization characteristic. There is no centralized clearing house of each Bitcoin transaction. That is the beauty of Bitcoin, at least to some groups of people, because transactions are not monitored by the governments around the world. Who likes this most? Of course the underground economy like terrorists, drug traffickers, smuggling syndicates ...etc. Prior to the age of Bitcoin, they have to launder their profit by money-laundering which is troublesome and risky. Now life is much easier for those groups at lease in realizing the profit from underground economy to the surfaced one.
So Bitcoin is a lubricant to the crime? Well perhaps criminals are the groups that can capitalize on the beauty of Bitcoin most but they are not the only beneficiaries. Any individual whom has the need to transmit money across borders is one of the examples. In fact what crime money is indeed is a controversy per se. Firearm trade in Hong Kong is of course a crime but it is legal in the America. Casino is forbidden in Hong Kong but they thrive in Macau. There is too much grey area between crime money and its counterpart. After all, Bitcoin is only a intermedia just like a knife is a productive tool to a butcher but a deadly weapon to a psycho.
Some said Bitcoin is a bubble which will vanish just like the tulip bubble did. Well, as long as it keeps meeting the need of some interested groups, I don't see it will die out. Yet whether one should join the bandwagon, it is totally one's assessment. No doubt there is a quite obvious tendency of price manipulation because the Bitcoin holding concentrates in the hands of a few players whom can drive the price in either direction. What makes it even complicated is that the Wall Street is stepping in this once alienated financial product by operating futures for Bitcoin. Higher volatility in the future is unavoidable and the price call will gradually shift from the existing big players to the Wall Street. When Wall Street tasted the blood of Bitcoin then it is unlikely that it will let Bitcoin dies out.
2018年3月14日 星期三
Is there on earh a guaranteed winning way in investing?
In the high time of market trend, there are many ads about tuition on investing in all kinds media. All of them are saying they have a winning strategy and as long as you pay to learn then you will be benefited. I have never attended such courses. I am not sure whether the tutors really have a winning strategy but if I have one then I won't bother to organize courses. Superman Li never did that as far as I know. Nor did Buffet.
However, I do agree that there is a for sure winning way in investing. Am I self contradictory? Not really. Any one knows statistics must has heard about probability. As long as you can construct a trading system that has a success rate over 50% and you have a strategy to win at a reward rate higher than 2 times of the bet placed, over the long run you are bound to win. This is a guaranteed winning way. If you think such thing never exists in the world then you are damn wrong. In fact, it is never far away from us. All casinos know what it is about. It is the for sure winning system that makes casinos never lose in the long run. So to punters, gambling is a trial of luck but to casinos, gambling is a business, a business that never lose except the loss arising from poor business operation but never from hosting gambling table.
When there is really an ever winning way in the world then we, being investors, must learn how this winning way can benefit us. Many investors are keen in learning different kinds of investing philosophies like value investing, trend investing...and seriously study the methods of fundamental analysis and/or technical analysis in the hope that they can master something to beat the market. I do agree that those skills are important and useful. However, without an guaranteed winning system, most if not all, wins in the investing are kind of chance but not guaranteed.
Don't know who once said that investing falls somewhere in the spectrum between arts and science. I further refine the saying that the analysis part of investing is arts while the execution part is purely science. For example, the way to evaluate the value of a company is really an art although there are analysis methods seems scientific yet there are many subjective assumptions when doing the evaluation. Even the technical analysis has a lot of subjective assessment, like the way how to count the waves. However, when it comes to the execution part which means the trading system. It purely rests on the statistical reasoning. As what I put it in the earlier paragraph, as long as the trading system has a proven 50%+ winning probability and a return rate of 2 times or more, profit is guaranteed in the long run of investing. What we need to do is to construct a trading strategy that meets these two criteria and back test it with historical database.
So to me, winning in investing is all about a reliable trading system.You may say such system is too good to have one and wonder its existence. Yet I have it. Hope you can also build yours.
However, I do agree that there is a for sure winning way in investing. Am I self contradictory? Not really. Any one knows statistics must has heard about probability. As long as you can construct a trading system that has a success rate over 50% and you have a strategy to win at a reward rate higher than 2 times of the bet placed, over the long run you are bound to win. This is a guaranteed winning way. If you think such thing never exists in the world then you are damn wrong. In fact, it is never far away from us. All casinos know what it is about. It is the for sure winning system that makes casinos never lose in the long run. So to punters, gambling is a trial of luck but to casinos, gambling is a business, a business that never lose except the loss arising from poor business operation but never from hosting gambling table.
When there is really an ever winning way in the world then we, being investors, must learn how this winning way can benefit us. Many investors are keen in learning different kinds of investing philosophies like value investing, trend investing...and seriously study the methods of fundamental analysis and/or technical analysis in the hope that they can master something to beat the market. I do agree that those skills are important and useful. However, without an guaranteed winning system, most if not all, wins in the investing are kind of chance but not guaranteed.
Don't know who once said that investing falls somewhere in the spectrum between arts and science. I further refine the saying that the analysis part of investing is arts while the execution part is purely science. For example, the way to evaluate the value of a company is really an art although there are analysis methods seems scientific yet there are many subjective assumptions when doing the evaluation. Even the technical analysis has a lot of subjective assessment, like the way how to count the waves. However, when it comes to the execution part which means the trading system. It purely rests on the statistical reasoning. As what I put it in the earlier paragraph, as long as the trading system has a proven 50%+ winning probability and a return rate of 2 times or more, profit is guaranteed in the long run of investing. What we need to do is to construct a trading strategy that meets these two criteria and back test it with historical database.
So to me, winning in investing is all about a reliable trading system.You may say such system is too good to have one and wonder its existence. Yet I have it. Hope you can also build yours.
2017年10月7日 星期六
How do you classify your investments?
Nowadays many people have investments in one way or another. Stocks,
properties, REITs, ETFs, mutual funds and bonds are the most popular choices. Of course there are
some other "investments" like warrant, CBBC and option. Even bank saving
could be considered as investment as well despite of the miserable
return.
I don't know how other people classify their investments but I do it in my way according to the possibility of value appreciation (depreciation on the otherwise direction) and whether there is income generation by the investments. The classification falls into category 1, 2, 3 and 4 in the below matrix.
Cat. 1 investment can generate income while possibly enjoys value appreciation (depreciation as well). This is the ideal class of investment. At certain time frame, rental properties and certain types of stocks are good examples.
Cat. 2 investment just earns income only but does not see value appreciation over times. Holding bonds till maturity falls exactly into this category.
Cat.3 investment is the opposite of Cat. 2 so no income is received during the investment period. All one hopes is the price hike followed by a sell off for profit. Most, if not all, growth stocks that pay out close to zero dividend are the examples.
Cat. 4 is basically not an investment because it neither generate income nor will it appreciate over times. Cash or saving bank account deposit match exactly this criteria.
So one may ask why classify the investments in the first place as long as they make money in one way or another. This is about the objectives of our investment. That is to say why we invest in the first place. The objective of investment largely associates with our life cycle. Understanding in what stage of life cycle one is in then he/she can develop an investment strategy to best meet his/her needs by holding the corresponding categories of investment items.
Of course these four categories are not mutually exclusive. One can hold all four at the same time but putting an appropriate percentage among them is important and adjusting the percentages along the life cycle is even more vital. So in the first place one must examine into what categories his/her investments fall into and check what percentages they are in. Holding an inappropriate category and particularly having too much could be harmful to one's financial well-being. Just imagine a 80 years old retiree holding 10% of Cat.4 but 90% in Cat. 3, ie., no income but hopefully price hike could be fatal in case of the market crash. On the other hand, a young person with majority of his/her assets in cash will not render him/her a fast track of wealth accumulation. Both of the scenarios are not desirable.
So classifying the investments is not the end but just the first step. The key point is to know what investments one is holding then to adjust the holding percentage in the four categories in the investment portfolio to achieve the optimal balance between cash income and value appreciation. Simply speaking, investments classification is the just means while the allocation of investments to achieve the goal of cash income and value appreciation is the end.
I don't know how other people classify their investments but I do it in my way according to the possibility of value appreciation (depreciation on the otherwise direction) and whether there is income generation by the investments. The classification falls into category 1, 2, 3 and 4 in the below matrix.
Value Appreciation
| |||
Yes
|
No
| ||
Income Generation
|
Yes
|
1
|
2
|
No
|
3
|
4
| |
Cat. 1 investment can generate income while possibly enjoys value appreciation (depreciation as well). This is the ideal class of investment. At certain time frame, rental properties and certain types of stocks are good examples.
Cat. 2 investment just earns income only but does not see value appreciation over times. Holding bonds till maturity falls exactly into this category.
Cat.3 investment is the opposite of Cat. 2 so no income is received during the investment period. All one hopes is the price hike followed by a sell off for profit. Most, if not all, growth stocks that pay out close to zero dividend are the examples.
Cat. 4 is basically not an investment because it neither generate income nor will it appreciate over times. Cash or saving bank account deposit match exactly this criteria.
So one may ask why classify the investments in the first place as long as they make money in one way or another. This is about the objectives of our investment. That is to say why we invest in the first place. The objective of investment largely associates with our life cycle. Understanding in what stage of life cycle one is in then he/she can develop an investment strategy to best meet his/her needs by holding the corresponding categories of investment items.
Of course these four categories are not mutually exclusive. One can hold all four at the same time but putting an appropriate percentage among them is important and adjusting the percentages along the life cycle is even more vital. So in the first place one must examine into what categories his/her investments fall into and check what percentages they are in. Holding an inappropriate category and particularly having too much could be harmful to one's financial well-being. Just imagine a 80 years old retiree holding 10% of Cat.4 but 90% in Cat. 3, ie., no income but hopefully price hike could be fatal in case of the market crash. On the other hand, a young person with majority of his/her assets in cash will not render him/her a fast track of wealth accumulation. Both of the scenarios are not desirable.
So classifying the investments is not the end but just the first step. The key point is to know what investments one is holding then to adjust the holding percentage in the four categories in the investment portfolio to achieve the optimal balance between cash income and value appreciation. Simply speaking, investments classification is the just means while the allocation of investments to achieve the goal of cash income and value appreciation is the end.
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