Interesting Financial Questions

Rebalance: a systematic way of selling high and buying low.

Question: When we do rebalancing, how do we know whether we are not selling off winners (high) to buy losers (low)?

This question arises because we are used to buying more of the stuff that makes us money, and selling off the stuff that loses us money. Winners makes us feel good, we want more of the good stuff. The losers are a painful experience, we want to get rid of it as soon as possible.

Essentially the question is asking, how do I get more of the good stuff and get rid of the bad stuff. Now when we say sell high and buy low, it is coming from a place where all our investments are allocated in a structured and well thought out manner. It is coming from a diversification mindset where we decided to spread out our investments into different baskets where the price movement of one basket does not mean another basket will move accordingly in the the same direction or magnitude.

If we had done our homework of our investments, we will know whether all our baskets are in good hands or not. If a certain basket went down in value, it is not that a good stuff has suddenly turned bad. It may mean a good stuff has gotten BETTER in value, it may mean a cheap sale is now on. Similarly, if a certain basket went up in value, it may not be that a bad stuff has now turned good. It may mean a good stuff has gotten more expensive, it may mean something has gotten more dear.

If we do not select our investments carefully, indeed if we own a few asset classes that are SIMILAR, then indeed rebalancing will only cause us to sell our winners and buy our losers.

 

Question: How much insurance can you afford? How much of your salary can you afford for insurance? How much love can you give a loved one in the form of insurance?

This is a common question which no amateur investor has an answer for. Indeed as a proportion of our salary, we can certainly buy lots and lots of insurance. As we go up the income scale, we do see professionals like doctors, engineers and businessman buying loads of it.

When we are presented with insurance as a form of love, obviously our love is unlimited, has no bounds, especially for our own children. Luckily there is a definite correct answer for this question, which is to buy as much insurance as NEEDED only.

Question: How much insurance is needed?

This is a more complicated answer which has to do with our liabilities, dependents and cashflow. Basically, if we do not have a holistic view of our finances, we will not be able to find the answer to this question. As most people cannot answer this question with certainty, some will end up buying extra insurance to support friends and families or just to shut up agents. This of course may impact their financial wellbeing in ways that may not be clear until much later.

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