Financial Freedom

You don’t have to own the company or be a CEO. Here’s how to build a rich nest egg one paycheck at a time.

By Kiplinger’s Personal Finance Magazine

A number of the people profiled in “Millionaires tell how they did it” made their millions as entrepreneurs. But working for the Man doesn’t mean you have to be a wage slave or resort to buying lottery tickets to strike it rich. The trick is to maximize your income on the job (and know when to move on), make the most of your employee benefits and tax breaks and use that extra money to start investing.

1. Keep your eyes peeled for better ways to do your job. Streamline a procedure, shave costs, create a new profit center, become an expert on a specific topic, volunteer for a company committee — anything that will make you stand out as a prime candidate for a promotion or a pay boost.

2. Don’t be afraid to negotiate. In a study of master’s degree graduates from her university, Carnegie Mellon economics professor Linda Babcock found that those who negotiated their first salary boosted their pay by 7.4% compared with those who didn’t bargain.

3. Get your ducks in a row and your numbers on paper. If possible, quantify how much your efforts add to the company’s bottom line. If that’s not feasible, spotlight your value with comparable salaries for workers in your position from a Web site, such as Salary.com, or from a professional association.

4. Plot your strategy when it’s time to move on. Create a professional-looking page on MySpace that tells prospective employers why you’re an exceptional candidate, recommends John Challenger of the outplacement firm Challenger, Gray & Christmas. And don’t neglect more conventional networking: Join a professional association or show up at school reunions toting business cards.

Milk your benefits
5. Contribute as much as you can to your 401(k) and other tax-deferred retirement plans. You’ll not only build a bigger nest egg, but you’ll also cut your tax bill. In the 25% federal tax bracket, every $1,000 you contribute to a 401(k) trims your taxes by $250. And you’ll save on state income taxes, too.

6. Flex your tax-saving muscle. Contribute pretax dollars to a flexible spending account to pay for dependent care or out-of-pocket medical expenses. If you set aside $1,500 per year and you’re in the 25% bracket, avoiding federal income and Social Security taxes means Uncle Sam will subsidize almost $500 of your expenses.

7. Review your tax withholding. If you’re expecting a refund this spring, you’re having too much tax withheld from your paycheck — and making an interest-free loan to Uncle Sam. That’s no way to become a millionaire. Put more money in your pocket by using Kiplinger’s withholding calculator and then filling out a new Form W-4.

8. Stash savings in a Roth IRA if you’re eligible. Withdrawals in retirement, including decades of compounded earnings, will be tax-free. This year, income-eligibility limits for a Roth increase to $114,000 for individuals and $166,000 for married couples.

Invest like crazy
9. Don’t delay. The quicker you get a jump on putting money aside, the easier it will be to stuff a seven-figure cushion. If you start at age 25, for example, investing $286 per month will get you $1 million by age 65, assuming you earn 8% annually.

10. Invest automatically, either through your employer’s retirement plan or by setting up a regular deposit to a mutual fund or broker. You’ll never miss the money, and you’ll avoid two big mistakes: buying too much when stock prices are high and not buying at all when prices fall.

11. Watch for fund fees. The more you pay, the tougher it is to earn an above-average return. The typical hedge fund, for example, takes 20% of any gains, a huge hurdle to overcome. A better bet: no-load mutual funds with expense ratios of 1% or less. If you trade individual stocks, watch those commissions.

12. Keep it simple. Be wary of get-rich-quick schemes or sales pitches for complex investments, such as oil-and-gas partnerships, that trade on the millionaire cachet to lure investors into buying high-fee products they don’t understand. Most millionaire households accumulate their wealth over the long term by sticking to a regular investing plan in a balanced portfolio.

Published Feb. 27, 2007

CAPITAL TALK
By i Capital

The US subprime problem will not be catastrophic because central banks and monetary policy have become more sophisticated and anticipatory. Sources of US economic growth have also broadened due to the change in forces shaping the global economic structure. One of the most important forces is the rise of China

CHINA is now the world’s fourth largest economy and is projected to overtake Germany as the third largest soon. China contributed 17% to the world’s gross domestic product (GDP) growth in the last five years as opposed to 16% from the US. The emergence of China has a significant impact on the world economy.

First, commodity prices have surged due to a large extent to China’s strong growth. Commodity-producing countries have benefited tremendously from the persistently high commodity prices. Second, the world economy had been experiencing low inflation rate despite the sustained strong global economic growth and high commodity prices in the past seven to eight years.

This in turn enabled central banks to maintain a low interest rate environment, which facilitated economic expansion. China’s huge and cheap manufacturing capacity played an important role in creating this favourable condition.

Third, China’s rapid economic growth has lifted her purchasing power tremendously. China is now the world’s third largest importer. This has made her an important destination for many countries’ exports, hence lifting the growth rates of these countries. China’s rise has made the world’s economic structure more balanced. The US has dominated the world economy since World War Two, giving rise to the phrase “when the US economy sneezes, the world catches a cold”.

With China becoming a major source of world economic growth, the world need not worry so much that the global economy will collapse should the subprime problem cause the US economy to slow down sharply.

Although China is still unable to take the place of the US completely, the impact of a US slowdown will be significantly reduced. The last time the US economy fell into a recession in 2001, China’s economy expanded by 8.3% and the world economy expanded 2.5%.

Some people may argue that exports are playing an increasingly important role in China’s economy, and a slowdown in the US economy will affect China’s growth significantly, hence limiting her ability to support the world economy.

Well, from 2002 to 2006 when the Chinese economy expanded above 9%, with the exception of 2005 and 2006, net exports contributed less than 10% to China’s real GDP growth. Consumption and investment were the main growth contributors, accounting for 80% to 90% of overall GDP growth.

In addition, US’ share in China’s exports has been rather constant in the last six years, hovering around 21%. Exports to the US account for about 7.7% of China’s GDP. Hence, a 10% fall in China’s exports to the US would shed only 0.77 percentage point off China’s GDP growth.

In 2001, China’s exports to the US still managed to grow 4.2% although the rate of growth was substantially slower than the 24.2% increase in 2000. Therefore, a substantial slowdown in the US economic growth is not expected to have a major impact on China’s economic growth.

While a number of Chinese banks have some exposure to the US subprime market, losses are expected to be small; hence, no material impact is expected on the economy. With China’s surging inflationary pressure, investors are also worried that the People’s Bank of China (PBC) will tighten monetary policy so aggressively that China’s economy will hard land.

i Capital thinks chances of this happening are almost zero. First, the inflationary pressure came mainly from food, whereby supply was affected by bad weather conditions and a disease outbreak.

In the first half of 2007, the core inflation rate, which excluded food and energy prices, stood at a mere 0.9%. Hence, the PBC is unlikely to raise interest rates aggressively in response to this temporary spike in inflationary pressure.

Second, while China’s stock market is still in a frothy state, the Chinese government is more likely to introduce direct measures to deal with the condition rather than implement indirect measures, such as an aggressive interest rate hike.

Third, 2007 and 2008 are very important years for China. The 17th National Congress of the Communist Party of China will be held next month. This is a very important meeting as new leaders will be elected to lead the country for the next five years. Hence, party leaders cannot afford to let the economy tank.

China will host the Olympics in 2008, a highly important event to boost her international standing. It is unlikely the Chinese government will let her economy slow down so much that social stability will be undermined.

Hence, taking all factors into consideration, as the subprime problem continues to unfold, i Capital believes that China will be able to play the stabiliser role she had played so well during the Great Asian Crisis. The world economy will still be able to grow reasonably well in the face of a sharp US economic slowdown.

Today’s article explains the importance of having an investment plan and ways to devise an appropriate investment portfolio

EVERY investor aspires to earn the highest possible returns but this approach often ignores the need for an investor to first accept the volatility risk that comes with earning high returns.

It is best for investors, before making an investment, to ask themselves how much volatility they are able to withstand and work backwards to obtain a reasonable level of expected returns based on their risk appetite. If investors want higher returns, they should be prepared to take on greater volatility risk.

To better manage their expectations, investors first need to understand their behaviour towards volatility. This can be achieved by answering the following questions: the extent of losses one can bear in the short term before an investment earns a return; the time one has to stay invested; the need for the investment to provide immediate liquidity; familiarity with the investment and financial markets; available time for managing and learning about investments; and the expectations on returns.

Why is this important? Understanding oneself is a prerequisite to devising a personal investment plan and portfolio. Having a customised investment plan keeps the end objective of investing in focus.

It also helps counter pressure to go after what is hot in the market and avoid panic when markets suddenly turn downwards.

Aligning investment plans to risk profile

An investor can be generally classified into one of three risk behaviour profiles: aggressive, balanced and conservative.

An aggressive investor generally has the highest tolerance of volatility. He would, therefore, be comfortable staying invested in an instrument that may be making losses in the short term, but which could perform well in the longer run.

A conservative investor prefers minimal or no exposure to volatility and would be uncomfortable with short-term negative returns.

The profile of a balanced investor is between that of an aggressive and a conservative.

Once an investor has ascertained his risk behaviour profile, he can determine how much to invest in equities and fixed income or capital protected type of investments by adopting the “Strategic Asset Allocation” strategy. This tool forms the basis of allocating assets based on an investor’s risk profile independent of market condition (See Table 1).

An investor can maximise returns in the short to medium term by varying the allocation to each asset class, depending on the equity market environment. This can be done using the “Tactical Asset Allocation” strategy as shown in Table 2.

As the strategy requires active management of the portfolio, a great deal of insight and conjecture about the economy, financial markets and investments, investors are advised to work with financial advisers.

The next step is to select investment products in each asset class with attention to understanding the respective return, volatility and correlation profile with other investments.

As covered in the previous article, a superior portfolio is one that maximises return for a given level of volatility risk. That involves diversifying into various investments that have low or negative correlation to one another. Table 3 shows the various types of investments classified into different categories.

Given the current uncertain outlook for equities, investors should focus on investments that have less volatility in returns and low correlation to equity returns.

Examples of the former include fixed-income securities, under-researched growth stocks and structured products. And for the latter, commodities and foreign exchange.

Rebalancing portfolio

The final but often neglected or forgotten part to investing is to periodically re-balance the investment portfolio. Re-balancing involves buying and selling investments in the portfolio to bring the asset allocation for each asset class back to either the Strategic or the Tactical level.

Re-balancing automatically results in cutting back on performing investments and adding to under-performing investments, provided the case for investing in the latter is still valid.

Investing should involve proper planning, knowing one’s behaviour towards volatility and understanding the reasons for changes made in portfolio, because failure to do so could lead to unfulfilled expectation on investing.

Source: TheStar October 4, 2007