Risks in Life (Finale)

For a while we have been talking about where Risk fits in our day to day financial decision points, and I have been adding in examples of Risky Business in my life, today (finally) we wrap this whole thing up.

Previous Posts: Risks in Life I and Risks in Life II

When to Sell?

Yup this one is the big risky one that, I can assure you, I have no idea of when the best time to sell a security is, blind luck has been my best method. Most of my “great” financial decisions have been forced upon me (i.e. I needed to sell to get the money in question), so deciding that a security should be sold is something I am not very good at prognosticating.

I have read many books who state unequivocally that if your investment decisions are made emotionally, you will lose in the long run. Going with your “gut” is a dangerous game to play in poker and also in investing, the danger is that if your “gut” is right once, you may rely on it far too much in the future.

Take your profits is the best way I have heard (e.g. re-balance your portfolio) in the world of investing. If your portfolio has one area that is doing great, maybe it is time to take your profits and lock them in, instead of “letting it ride”? Maybe you are very risk averse like me (i.e. burned so many times, I have very little nerve left), if that is the case taking your profits, when you see them might be your best decision point.

Am I espousing a specific investment method? No, my regular readers know me better than that, you need to find a method that fits your needs and I am NOT in any way shape or form advising you on what to buy, what to sell and when to do either, I am simply pointing out in my case, “Take the Money” has worked. I’ll let the REAL investment blogs talk about that kind of stuff.

The risks in this scenario is obvious, take your money now, or will you have more later?

RRSP or Mortgage?

Is this a risk area? That’s a good question, I don’t think it is a high risk area, unless you are doing something wacky like the Smith Manoeuvre or something like that, if you do either of these (pay down mortgage or build up RRSP), you are doing OK.

I have seen a few different models done about the ideal model for paying down debt/mortgage and RRSP contributions, but I am very debt averse right now, and also am in a relatively stable pension situation, so my decision has been to attack debt as much as possible (with a little success).

The risk again comes down to present money value vs. possible future gains. Get a plan for how you want to deal with it and then stick to it.

So What About Risk?

As we have seen the past few days, risk comes into most major (and a lot of minor) financial decisions but you need to weigh risk against the benefits and make your decision in a calm and rational manner.

Analyze the risks, weigh them in your decision, and you should do just fine.

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Risks in Life (Part II)

Yesterday we discussed the topic of Risk and its importance in key financial decisions in your life. Today we continue on with more examples from my life about Risk and how it played part in my decision process.

Example 2: Exercise Options or Not?

When I worked at Nortel, I had stock options and there was always the question about whether I should exercise the options or hold them in case the stock went up in price. Luckily for me, they were never worth more than $389.67 (yes I remember the exact amount), and no I didn’t exercise them, because I was foolish, so that money was never mine.

Many people I worked with had the same decision to make but with MUCH larger valuations on their options, and they didn’t “pull the trigger” either. I do know a few folks who simply said, “Give me my money”, every time their options came up, and didn’t care about whether the stock might go up, they simply wanted their money, and those folks (in hindsight) are the ones who did the best in the options game.

Risks are high in options, and luckily it’s a game I won’t play any more.

Example 3: Buy or Lease a Car?

Many of my friends have leased cars, but I never thought for me it was a good deal. I have owned used cars most of my life (I did buy a GM product new, which luckily I had an extended warranty on) and I have typically driven my cars until they were dead (or 5 months after that), or until my mechanic told me I had to get rid of it (he did refuse to fix a Honda Accord I owned that was in very bad shape).

My view of a car is purely functional, it is not a part of my masculinity or of my prestige, so having a new car is nice, but not an important variable for me.

Leasing usually means you can afford “more” car than you can afford, however, after 3 years you own nothing (and if you have driven it too much, or worse dinged it once or twice, you are hit with extensive punitive fees). You can simply walk away from the lease, or you can buy your car at that point, however the money you paid in lease hasn’t gone towards the car really, you are simply paying the current value of the car.

Is there risk here? If you BUY a lemon (i.e. a car that is just overrun with defects and issues) you are going to have a problem getting rid of it and it will cost a lot to maintain, since you can walk away from it if you lease the car (typically the lease period and warranty period are about the same time frame).

I’ll continue to buy cars, unless I get a job where leasing might make sense (i.e. you can write off the value of the lease as a percentage of how much it is used for your job/business).

Tomorrow: Final examples and an epilogue

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Risks in Life (Part I)

Do you take into consideration all the risks that are part of your financial decisions? Do you look before you leap, or do you just roll the dice and let the fates take care of things for you? How do you deal with risks in life ?

Risk is  part of all decisions, and you can paralyze yourself worrying about risks, especially in personal finance, but with larger financial decisions it is imperative to think about what you are about to do, and what risks are part of the decision.

Let me run through a few personal experiences with major decisions and risk.

Example 1: Lock In or Float?

With folks buying their first home, the question always arises, should you lock in your interest rate, or should you go with a lower but floating interest rate? Back when I was looking at houses for the first time, I locked in at 11% thinking I was getting a great deal (given interest rates had been at 18% previously), so I locked in for 5 years. The decision was made because we could afford the payments at that rate and didn’t want any surprise increases in our budget.

The decision was wrong in hindsight because interest rates dropped quickly, but I don’t view that as a wrong decision, more a conservative decision.

I now live on a floating interest rate loan vehicle, because I can withstand a sudden sharp interest rate increase.

The risk here is, can I withstand catastrophic interest rate increases?

Tomorrow: More examples…

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Accountability

In Ottawa this week our Hockey team fired yet another coach, meaning our team is actually paying for 3 different coaches right now (the one we fired last year, the one we fired this year, and the current coach), which is not very good planning (paying 2 people NOT to do a job), however, the main statement is that the previous coaches did not hold the players accountable for their play (i.e. the players were allowed to do what the heck they wanted without concern of less playing time, or punishment for sloppy play in practice) and thus the players were “lazy”.

This got me thinking this accountability concept is vital in business and a few of the bigger problem areas of the economy there is a lack of accountability seen as well.

Bank CEO’s

We are seeing the Canadian Bank CEO’s making an attempt to appear to be “tightening their belts” and “taking one for the team” by eschewing some bonus money. While my opinion is this isn’t enough, at least the optics of the acts show at least some penitence for their actions, and thus some perceived accountability.

High Tech

There I don’t see as much. Nortel’s CEO has still not really shown any contrition or accoutability in his actions, which makes a lot of folk wonder does he feel accountable for the companies current situation? Employees who are about to get laid off with little or no severance are not as likely to “go to the wall” if they know their CEO is still raking in big money.

John Chambers from Cisco on the other hand for a while (and might still now, I can’t find any coroboration) took a salary of $1 per year (he got other compensation), but that alone has great optics for employees. Is he still very rich? My guess is it is not likely that he is trying to create extra income for his family by taking a part time job at Home Depot.

Overall Accountability

Accountability of the folks in power and of anyone you deal with directly (especially when it comes to your money) is a vital thing to look for. 

If you have a financial advisor, how are they accountable to you? If they give  you bad investment advice what happens? Ask that if you are talking to your advisor. If their answer is, “… well, I’ll try to do better next time”, you might want to think about not hiring them. How can you make this person accountable for their decisions with your money?

How do we make CEO’s of large firms accountable? Make sure if you are a stock holder you vote for your Board of Directors, since they are supposed to represent your best interests (whether they do or not, is another question). Go to the yearly stockholders meetings, ask questions and read the company prospectus (no matter how painful it might be).

You can’t hold someone accountable for anything, if you aren’t sure of what they are doing, and you can’t ask pointed questions about what is being done, if you don’t know, “what is being done”.

Make yourself accountable for your decisions, but also make the folks you deal with directly (and those that work for you) accountable for their actions and decisions, it will make the whole system work that much better.

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Who Lives On The Median Income?

Looking over at Stats Canada this week, you can see that they have published a report on the Income of Individuals for 2005. The article says:

The median total income of individuals amounted to $25,400 in 2005, up 1.9% from 2004 after adjusting for inflation. This is the largest annual increase in median total income of individuals since 2001. The median is the point where one half of incomes are higher and the other half are lower.

This is one of those, good news, and head scratching news. The good news is that the median total income has gone up by 1.9% so that is a good thing (it would be bad if it had gone down). The head scratcher part of it, is the question of just who is living on this income level?

The median employment income is a little higher at $26,300, but that again seems pretty darn low.

If you have a couple that together are making $52,600 that is a bit better, but again, that seems low.

Now let us bear in mind what the mathematical term Median actually means. Do not confuse Median for Mean or Arithmetic Average , which is:

Mathematical Mean

Pardon me? Add all your numbers up and then divide it by the total number of numbers you added. This article does not mention Mean or Average income, it talks about Median.

What is Median?

What is Median

Now THAT looks complicated doesn’t it? OK, what Median is, simply is the middle value in a list of numbers. This middle number may be nowhere near the average of all of the numbers, so this Median means half of all Canadians either make or earn less than $25,400.00 and half earn more than that.

What does this number mean, in my opinion is that the gap between the “haves” and “have nots” is widening at an alarming rate these days.

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