Risk Choice Behaviour

Financial Analysts are often perceived as experts who incorporated information regarding their field, i.e., finance and investments immediately as they make predictions on future earnings (forecast), and give advices on stock markets based on their rational analysis in an unbiased way.

Nevertheless, like normal human-beings, the decision-making process of an financial analyst is also affected by various factor as several studies have reported inefficiencies and/or biases in analysts’ ability to incorporate new information into their earnings forecasts, albeit the results of these studies have been mixed.

Specifically, when the accuracy of initial earnings forecasts is evaluated as a loss (a loss is deemed to have occurred when the estimation on earning made by the analyst is not met by the actual earning), analysts will choose more risky prospects when issuing revised forecasts. As a result, risky choice may lead to optimistic forecast behaviour. Furthermore, the prospect of getting incentives also deter the analyst to display a more risk tolerant character when making revised forecasts, regardless of the accuracy of their initial prediction.

This finding has proven that financial analyst, no matter how qualified or experienced they may be, tends to make biased predictions, estimations and outlooks as their thinking circuit is affected by the incentives and various motivational factors as well. Therefore this has somehow explain why the experts in Wall Street have been giving comments such as prices for petrol would not reach $100 per barrel 2 years ago, only to get shocked by the price that peaked at $147 last July, and this time, Wall Street experts also claimed that the subprime crisis and housing bubble would not have the effect we are not experiencing that has cast a huge gloomy shadow on a global scale. Need more proof to convince that experts might not give rational prediction?

Look at the technological bubble, before the bubble burst, and even the bubble had burst, so called experts still claimed that the growth in world wide web and technology would not be saturated, forgetting to take into account limiting factors.

The ups and downs in the market should be predicted by those experts if their expertise and knowledge were really to be such rational and accurate. But there are other factors at work here, like the incentive they would receive, and their bullish egoism. Analysts tend to be more motivated to take riskier action after suffered an initial loss, prompting them to make more mistake by being more risk tolerant. Analyst who would gain more incentive or lucrative deal would also tend to take more risk, after all, higher risk comes higher return.

Hence, people, the public should be aware that no one can help us to make any single decision, no matter how light the decision may be, or how handicapped we are, we should always make the recommendations, predictions made by experts as our guidelines and reference point only, but not to follow what they say, because, their decision may biased toward their own perspective, but not ours.

THE REAL GOAL OF FINANCIAL PLANNING

Financial planning is a systematic and effective way of organizing our financial affairs to achieve our life goals. The much-quoted phrase “failing to plan is planning to fail” is all-too apt in this context. It’s better to start planning early than regretting later. In very simple terms, financial planning is really about knowing where we are, where we want to go to, and how to get to there.

Dr. Stephen R. Covey, the author of The 7 Habits of Highly Effective People said in his book, many of us get caught up in the ‘busyness’ of life, working harder and harder at climbing the ladder of success only to discover, upon reaching the top rung, that the ladder is leaning against the wrong wall!Bringing what he said to the area of financial planning, it is only through proper financial planning that we can identify what is most important and meaningful to us. Then only we can organize our finances and lives so that we do not end up leaning on the wrong wall.

Though our wants are infinite, unfortunately, our resources are finite. Financial planning helps us realize and understand that, in life, there is always trade-offs or sacrifices to be made. By trading in our good old car for the newest model or changing our ‘not-so-trendy’ hand phone to the coolest model in town, we are affecting out retirement next egg without realizing it. If we really want to achieve our important goals, we need to exercise delayed gratification and distinguish between our needs and wants.

The only constant in life is change and learning to cope with it early in life is a plus point. When single and carefree, we can practically live like there’s no tomorrow. However, when we settle down and have a family, our world changes dramatically. If you were to lose your job or be diagnosed with a critical illness, the effects would be magnified. With proper planning, you’d be better prepared to face such challenges.

Almost everyone wants to be wealthy but only a few have a game plan for achieving it. No involvement, no commitment. Wealth creation is not a sprint but a marathon. It takes time, discipline and a lot of financial stamina. With the help of a qualified investment adviser, we can then select the appropriate investment profiles that suit our risk appetite. By adopting various investment strategies and proper asset allocation, slowly but surely, we will cross the finishing line.

We want to feel assured that no matter what happens, our goals can be realized, either for ourselves or our loved ones. Through proper risk management and insurance planning, we will be able to provide ourselves and our loved ones with total peace of mind while we go about our daily lives.

With proper financial planning, we will be able to successfully realize our life goals. Our goal should not be just having a lot of money in our bank but also knowing what money can do for us. With its help, we can take care of our health with better-quality food and health supplements, provide our children with quality education and expand our horizons via travels. Last but not least, it allows us to contribute to society through the sharing of our knowledge, resources and time with the less fortunate. Therefore, true success is not merely about how much we have(quantity) but our quality of life.

Financial planning is really a means to an end. Ask yourself whether this is the kind of success that you would desire to have.

How NOT TO BE a millionaire

You have your first pay check.

That's a great news! You should stop reading right now for i will not be held responsible for what is about to unwind. It could get pretty depressing.

So, with your first pay check, you think you needed a car now.

Welcome to the world of debt repayments, road tax, auto insurance, ever increasing fuel, sky-high parking fees, tolls, traffic offences, maintenance fees and those occasional, completely unavoidable little accidents that seem to happen when you are replying to 'important and pressing' phone calls, you know, things like that.

Living in your prime time, you begin to think luxury is something you should go after and make it your brand. So, indulgences in things, and also probably on your hobbies, getting your collectible items, partying, entertainments, outings with your close pals, clothes, etc. Everything is insignificant when it comes to taking care of the most important thing in your life, YOU~

Bargains are irresistible. Even normal priced items cannot be denied their place of consideration. And we all have an urge to shop and buy stuffs, it doesn't matter for what, but it is in our genetics.

Then, you realize you would need a dream house now. You move out. You rent that dream single's pad. you fill it with minimalist designer furniture. You make sure its completely air-conditioned, you invest in a proper kitchen even if you do not know how to cook.

One day you wake up and you curse everyone, because you are now officially bankrupt. You were merely broke few paragraphs ago. You wish that you could turn back time and plan your money and manage your money in a smarter way.

Now, if you really want to enjoy everything that life has to offer way before an appointment with your personal plastic surgeon becomes a routine you can't live without(if you can afford these costly operations of course), simply visit
www.managemywealth.blogspot.com

It takes time to make our money make more money, but the first step always start with ourselves.

It is the education system in our country that has made us so exposed and victims to failure in managing our money, but it is not too late if we realize that is essential to keep us to go further in life, start to mind your own finance today, NOW

Today's luxury Compensates Tomorrow's Quality

Our Government has recently come up with a New Policy that seemed to lightened up most of the citizens by declaring that people who are contributing to EPF can choose to cut 3% of the contribution from monthly paycheck, up to 2 years time.

It was deemed as a piece of good news by most people because we could have more 'cash' by taking this 3% decrement in our EPF saving. This is exactly what the government is intended to do. By giving more ‘Cash’ to us, so that the demon of spending the money which is residing in everyone of us can finally get the better of us. When we have more cash in hand, we tend to spend more, and by doing this we stimulate the economy growth. So this is the intention behind the government rational for implementing this policy.

But to some people who have opted to stick to the 11% contribution to EPF instead of taking the 3% decrement, it doesnt mean they have enough cash in hand though. They simply see the huge complication this 3% cut would bring about in the future. By saving lesser into the retirement account, we are actually taking out our retirement fund and use it for today's luxury, risking the quality of our retirement lifestyle for today comforts.

Take for example, a person who's making RM 5000 for a living monthly would have extra RM 90 per month by taking the 3% off EPF saving. So for the effective time period of 2 years under this policy, RM 90 x 24 months = RM 2160.

However, if this RM 90 is injected into EPF like normally would, under the projected 5% interest rate offered by EPF, in 2 years time there will be RM2160 as well. However, as this RM2160 would be inside this account and enjoy a 5% interest rate, let say for 20 year time horizon when this person reach retirement age, this RM2160 would become around RM 5200, we are looking at a 100% increment from the RM2160. If this person draws salary RM 10000 monthly, it would become RM 9600++(take RM300 n spend it today, or prefer to have RM 9600 when retire)

Havent this illustrates that if we decide to spend more today by using the money saved for retirement purpose, we actually compensated the quality of our retirement lifestlye?

Wake Up to Rising Prices

Life insurance is a simple matter.

Just choose the amount of coverage you want. If the unexpected and dreaded event happen, this amount will be enough for your family's needs, just as you wanted.

Wait. Not so quick. There is something else that must be considered here.

Rising price.
or in a term which everyone hate it,
Inflation.

Spurred by soaring fuel and energy prices, the inflation rate has galloped to a 27-year high of 8.5% in month July 2008, as compared with 3.8% in month May.

Because of the high cost of living, most of us have had to tighten our belts. Some of us may even consider cutting back on insurance when, in fact, during inflationary periods, we should actually be thinking about increasing our level of protection. That's because inflation has an effect on insurance coverage, be it life, medical, investment-linked or some other plan you may name about.

Keep Pace with the Rising Cost of Living

I'm sure all of us know that the cost of living today is higher than it used to be. Because of this harsh fact, the value of insurance coverage purchased a long time ago is less today than it used to be. Have your own say bout this? Let us look at this case study closely.

" Soon after his marriage in year 1984, Mr. Andy Examined his personal financial position and he concluded that a life insurance policy worth RM 100K would be sufficient for his family's needs if anything happened to him as a keyman to his family. But over twenty years on, his children have discoverd that the value of the coverage has diminished considerably."

'since the time our father first bought his insurance, prices have gone up for almost everything. Those days, you could eat lunch for under RM 3 but at this time it would easily costs RM 5 or even more. The rental has also spiked up,' said his daugher Mary. 'The money which was paid to us is not going to sustain as long as our father planned for it to be.'

Besides the value of insurance coverage, inflation also erodes the value of savings. Assuming an inflation rate of 6.0% p.a, RM 500k today will have the purchasing power of less than RM 150k from now. That's sobering thought because, if the rate were to remain at present levels, our money would be worth even less.


Start with a Review of Your Protection Options

Because of the rising cost of living, a review of your coverage is timely. It may no longer be sufficient for you and your family to maintain the standard of living that you originally intended. To bridge that gap, you should consider getting additional coverage to offset the effects of inflation- wheter it's with life, medical, retiremetn, education or estate planning, we just need a review on this area of our life.

Nowadasy, most company are promoting 'investment-linked' plan, a plan that offers protection and investment value at the same time to its holder. This trend has come about in our country because of the new rule that Bank Negara is about to implement next year, probably next June, a law known as R.B.C( Risk Based Capital). Under the implementation of RBC, company that would have to offset the amount they guarenteed to policy holder aside, unmoved, the fund that being offset is meant to give capital protection and assurance to policy holder that their guarenteed sum of money is being assured. This new implementation has spurred insurance company to start to venture into promoting investment-linked plan, as invesment-linked plan does not guearentee any capital protection to its policy holder whereas the risk is wholly dependent on the investment portfolio holds by the policy holder.

So at this juncture of time, if we were to do a review on our financial health status, we have to be very meticulous as well. But nevertheless, it is something we cannot escape from, to check on our financial and risk planning from time to time. Because the world that we live in is always changing, in fast pace.