Ignorance to Investment

A lot of times, when it comes to investing, people faced restriction from several reasons including:
- Conservative
- Had setbacks
- Procrastinate
- Misunderstood, wrong perception
- Excuses

Some people I've met had excuses such as:
- I've no money to invest
- I don't believe in investments
- If it's too good, there must be something I don't know
- I'm not ready
- I will get to that later
- I lack financial know-how
- I've been burnt before
- The risk is too high, etc.

I used to have such negative mindset after being burnt from mistakes during the Asian Crisis (1997) and Bursting Internet Bubble (2000). I was in denial when the market started falling during the months after April 2000 and refused to exit the market as I had no knowledge what was going on and gave myself excuses to leave my funds there only to see my funds plummeted by more than 50%, some losing more than 70%.

That was painful and I dare not touch investment again for the years to come till I started to relook at what went wrong and re-strategised my funds with some consolidation and taking painful cuts. The result from such an exercise with some brief knowledge saw my fortune recovering, though not back at the entry but at least I reduced my losses.

Recently, I looked at the market once again and asked myself if there is any potential market correction in the making. Since early this year (2007), there were 2 corrections, one in Feb/Mar and the second in August (U.S Sub-prime). Looking at the second correction, it shouldn't have affected the stock market but it did. I started reading into news reports to at least understand what the situation is and pondered what will happen in the coming months.

U.S Sub-prime was caused partly (i could be wrong though) by borrowers / home owners who took huge loans on their property mortgage (up to 100%) and the banks permitted it because of appreciating property prices in recent years. The first year of loan was faced with very low interest rates but rates will increase drastically on the second year or later and a good handful of borrowers couldn't afford the big jump in their regular mortgage installments.

With financial constrains, some borrowers default on mortage payment, some had to dump their investments and cash out to pay for mortgage, etc, thus ripple effects happened to the stock market. Of course, there are also other reasons that I have not analyse or not presented (too much info). Property sizeure happened, property market slowed down and prices started to depreciate, causing further problems.

U.S Fed Reserve had to take action to prevent a fallout on financial markets. Reading into potential action, they would likely reduced lending rates from 5.25%, bringing it down by 0.25% to 0.5%. The next Fed Reserve announcement would be on 18 Sept 07 and I took a calculated risk that interest rates will go down, thus stood by my beliefs and hung on.

I was guessing that the reduction will be by 0.25% but hoping that it would be a huge reduction of 0.5% instead. News were announced on 18 Sept 07 and interest came down by a whooping 0.5%. With that, I scheduled my exit from Unit Trust and happily took my money into another investment that gives a guaranteed return (15-20% pa).

I am learning and I hope to share my little knowledge or perception as I gain along the way.