The uncertainty of the investment
Today we are going to talk about the aspects behind investments and their psychology.
We are facing the uncertainty about investing in the financial world.
The human being is in the perennial search for security thanks to a natural genetic repulse to risk to make us survive.
Risk aversion in an environment where we can be killed by beasts or adverse climatic conditions is what allowed us to survive thousands of years ago.
Many people have an innate adversion to losses.
Try to think of losing 20 euros. In this case the pain will be greater than the pleasure of having earned the same 20 euros.
This means that these people are totally opposed to certain practices that allow them to increase their portfolio .
In fact, to have an interesting economic return you have to take risks, since risk is the fuel of the potential profit.
It is also true that some zero-risk investments still exist such as bank accounts but which yield practically are below zero.
And these are not at zero risk since there is the risk of bank failure.
Therefore, it is necessary to manage the investment risk.
In the financial world, risk means exposure to the possible loss of money, or the possibility that your investments will drop in value compared to the purchase cost.
The amount of risk we are willing to expose ourselves depends on various factors like volatility.
Volatility indicates an indecision on the price on the part of sellers and buyers, certainly equates to a greater risk that can be justified by the greater possible gain.
Precisely to maximize our earnings and to analyze the risk to which we are exposed, an analysis of possible events that could affect our investments must be made, a sort of exercise to manage some risks to which we may be exposed.
Among the risks that we can easily recognize are:
a rise or fall in interest rates by the central bank, affecting corporate loans;
a credit risk, with debtors unable to pay their obligations;
a sudden inflationary push in a specific country or worldwide;
A possible country risk, as happened with Greece or Argentina;
These last two risks can be placed in a large group that we can call
market risk or systematic risk.
This is a type of risk that can affect all companies operating in a specific country or market.
We are talking about a recession, which destroys all the spending power of the population or an environmental problem that jeopardizes a specific industry, such as a disease that attacks plants destroying them all over the world.
Going more into the details of a specific market we can then talk about the specific risk of a company, like Enron in the United States.
This type of risk refers to a specific company in a national or international market and can be caused by huge scandals, or by the appearance of new international competitors on the internal market or by a new legislative change that worsens our market situation.
Remember that every investment is under this kind of risk and that systematic risk is difficult to predict in the future while specific risk can be eliminated through diversification.
But then there are assets that are not subject to risk, those safe havens where everyone can take refuge.
Yes, they exist and generally the greatest exponent is gold.
However, it should be remembered that gold also has price fluctuations and that in the event of a crisis it could have a certain decline. But here we need to understand how much the drop is, for example if gold falls by 10% in a market that dives into minus 60 or 70% ...
Let's move on to another point of view, moving from investment to investor.
The psychology and preparation of those who put money into any investments are much more important than people think. It is necessary to understand the different risk tolerance of the different people who approach the market.
This tolerance is mainly given by two factors which are the predisposition to risk influenced by one's personality and personal financial culture, to which must be added the ability to manage emotions and the fear of losing one's money.
Managing anxiety and maintaining clarity to better manage the situation are two very important characteristics.
Think what could happen if we panicked at every slightest downtrend or wanted to take home every little profit.
Other factors that can make this situation worse, is your relative financial situation and in which time frame you are investing for your life. Maybe that descent won't change your life, but if you've used all your money on a single asset, it starts to be different.
Financial availability and your working salary are two factors that can make you feel better, combined with a long-term vision.
If we think of a personal safety net like a bank account with a good amount of money and a job with a good salary, a loss of 20% is something that we can expect. A short-term view means that risks and loss tolerance are approached differently.
The risks are generally in a short period of time, and the markets generally recover from the crisis by making new highs in a period of time that is not so long.
One last note aside, the age of the investor is also important. An elderly person is unlikely to get involved with particularly dangerous assets.
Do not focus only on volatility risk, but on real risks, on those things that are too good to be true and try to always have a long-term view.
Risk is necessary, it can be controlled but it cannot be avoided.
Learn more about safety here.
The difference between economy and finance
Today we are going to learn what is the difference between economy and finance in our society.
It is a difference that has been thinning lately but which is still present.
We have to start from a well-defined initial assumption, the stock market does not measure the same thing as the economy, they are two connected entities but they represent two separate things.
The financial markets as a whole represent all the stock exchanges in the world and their lists or indices such as the Nasdaq in the United States.
On these indices, stocks, bonds and other financial instruments of that specific country are bought and sold.
The market goes up when the value goes up, and goes down when the value goes down.
So the indices give us an idea of how the market is doing.
If the stock market lists are contained and easily calculated, this is not the case for the economy.
In fact, the economy is much more extensive and difficult to calculate.
A value like GDP ideally indicates a country's spending mass, but investments, exports, imports, household consumption, their debt burden and government spending must also be considered. We are talking about a huge number of variables.
Back to the stock market, this gives us an idea only of the trend of the companies that are listed on that list.
We are talking about a vision that we can define as distorted or very limited.
These listed companies are actually part of the country's economy but there are also a lot of companies that are not listed and are themselves part of the economy.
Most companies in a country are not listed, for various reasons.
A possible collapse of the economy would affect them all in a more or less serious way while a collapse of the stock market should not affect them directly, or rather it could affect them indirectly with regard to any listed partners or suppliers.
In fact, if we change our point of view we will see that most of the people who have a job are part of the economy, but not all of these workers have money invested in the stock market, so a decline in stock has no direct impact on the citizen while a collapse of the economy does.
However, it should always be remembered that the stock market is still important since it has an indirect impact on the economy and on citizens' portfolios. In fact, the value on the stock market is reflected in the banking relationships of companies.
Companies considered of little value on the market, in addition to struggling to survive the competition, cannot access loans and therefore funds for their business.
Returning to the stock market, it should be specified that it may or may not push the real economy.
A rising stock market will give investors a greater propensity to spend, an expense that will be inserted into the real economy circle by increasing wealth. This wealth will allow companies to grow, increasing their staff and their reference markets.
Collect more capital on the market that can be invested in the company itself, without also considering the "wealth effect" given by a rising equity portfolio.
Obviously, all of this is reversed if we have a collapsing stock market, with a slowdown in the real economy.
But this influence between the financial market and the economy is real, the trend of the economy also influences the financial market.
those who work on the stock market base their sales and purchase decisions on what they see happening to the economy and its players in the field.
These two entities are closely linked but not necessarily have to move in the same direction, this is because they focus on two different periods of time.
The financial market has a vision towards the future, those who buy and sell shares do so by thinking about what will happen and how the economy will go in the coming months or years.
So the stock market will grow if there is a belief that the economic world of tomorrow will be better than today.
You can take positions today that will last for years or decades.
The indicators of the economy instead look to the past, that is, they are a snapshot of what it is today, but more precisely yesterday.
Economic indicators can indicate a contraction and at the same time the stock market can grow because investors see a possible recovery of the global economy on the horizon.
Remember that stock market prices reflect investor expectations.
Expectations and not what will happen in the future.
The entities of economics and financial markets are two entities with major complications, which cannot be solved in simple numbers. Always have a balanced approach when investing your money.
ESG Investing
Today we learn how to invest ethically or what it means ESG
As we know, our society is constantly evolving.
Investments need an evolution, in this case giving greater attention to what is sustainable for the planet.
In fact, until now there was no particular attention in investments regarding the ethics followed by companies and the only parameter concerned was the mere profit of money.
Investments defined ESG as Environmental, Social, Governance investing
This definition applies to companies that are in line with the new perception of the modern public attention to social and ecological problems of the planet.
These companies are the ones to keep an eye on and to own if you want to create an ESG portfolio, or ethical portfolio.
Going to see deeply the ESG acronym, this means:
E as Environmental, we consider the pollution produced by the company, energy consumption and the green or non-green footprint that the company itself has, for example in the production of carbon dioxide.
S stands for Social, which includes respect for the rights of the various communities, the provision of fair salaries to all employees without discrimination, aid to minorities and social management in the workplace.
G stands for Governance, which is the management of diversity within the working community.
Now, how can we make sure that we have a state-of-the-art portfolio?
We have two methods, with some differences to apply to our studies on possible assets to buy.
The first method, which we can define as "negative" or "removal", involves our decision to remove from our possible purchasing choices those companies that have areas of interest such as tobacco, weapons, gambling, or are implied in fraud or minority mismanagement stories.
Once this selection is complete, the remaining companies will be our possible purchasing choices without further in-depth studies in this regard.
Otherwise we can use another method that we can define as "positive" or "inclusion".
That is, we seek only actions that give local and environmental benefits or follow initiatives dedicated to improving the world and gradually eliminating their impact on the environment through, for example, the use of only renewable or sustainable forms of energy such as solar and wind energy.
Now chosen the method, you as a small investor or an ESG fund manager, after having roughed up the list of buyable shares, will make a purchase choice based on other technical parameters.
The ESG method is not a standardized system at the moment, in fact it has different criteria and different points of view based on the manager's or purchaser's thinking.
We might be surprised to find some fossil fuel companies considered ESG compliant, this is because they are among the various companies in the segment the most efficient on many parameters such as their excellent impact on the economy of the community where they operate.
Remember that the ESG scores assigned to the various companies can vary a lot due to the difficulty of analysis.
Companies have many partners, they have long and complicated supply chains and everything behind it is difficult to analyze in depth.
This leads us to talk about a phenomenon, like greenwashing or the cleaning of the reports created by the companies themselves.
This implies creating green initiatives that serve exclusively to have a better ESG score but that in reality do not impact on pollution or improve the life of the community.
There may even be ESG scam profiles, in which reports are artfully created for companies that actually have no ecological target.
In short, you would invest in a company that cuddles unicorns on paper, but which in reality unloads the used oil from their vans and truck into the river behind the shed.
So beware of gray areas.
Currently, the ESG profile has become a bit of an hype, so funds and ETFs have been created made exclusively by ESG companies.
This solves the problem of choosing but at a higher economic cost. On the other hand, fashions always cost a little.
Also be aware that ESG criteria limit your diversification, creating greater investment risk.
In short, we find ourselves at the end of a clash between ethical investing versus traditional investing
However, what concerns the ESG method can lead companies to make changes to their production and management methods, even leading them to be ahead of the legislation that will change in the future.
Customers themselves are also more likely to buy ethical products when they know about them.
Toxic Asset
In this article we will talk about the toxic assets in the belly of banks. What they are and why they are in your bank's balance sheets.
Banks have various assets within their balance sheets. among these we can find bonds, shares, loans and then various derivatives such as MBS mortagage backed securities, CDO and CDS (Credit default swaps).
The part that could be toxic almost all of the time are the last 3 elements, which are derivatives. These derivatives are created through securitisations.
Securitization is a financial technique specially designed to transform non-transferable financial instruments into other transferable financial instruments.
These transactions can generate cash flows, such as bank loans, and are "transformed" into divided and salable assets into bonds called Asset Backed Securities (ABS).
This financial activity is carried out to drain additional monetary resources from the market. Its popularity as a tool for raising loans has grown considerably in recent years, which has allowed banks to feed into the subprime mortgage granting mechanism.
Based on the securitized underlying, we can speak of securities like:
MBS (mortgage backed securities, the underlying of which are mortgages),
CDO (collateralized debt obligation, the underlying of which are public or private bonds),
ABCP (asset backed commercial paper, which are short-term credits).
To give you an example of real securitization, you have to think of a bank that has a number of real estate loans among its activities; if the bank decides to securitize these assets then it will issue securities, which have home loans as collateral, which will be sold to private or institutional investors.
Our bank sells this group of mortgages to a Special Purpose Vehicle (SPV for short), created specifically for the purpose, which issues bonds (in the specific case of mortgages, Mortgage Backed Securities) which sells to investors like Pension Funds.
The risk is transferred by the bank to the final subscribers of the bonds,the payment of interest of the bonds are linked to the effective collection of the interests of the loans themselves.
Understand that if these mortgages go unpaid, investors will see the value of their bonds go to zero. In the years before the subprime mortgage crisis there was a very sustained growth in securitisations all over the world, reaching a peak of approximately $ 11 trillion in the United States and € 2 trillion in Europe.
Understanding what a securitisations is, let's get back to our toxic assets.
Sometimes banks don't really know what's in their belly as the rating agencies haven't done a real due diligence, so the risk is masked or hidden and in the end the banks have bought assets whose problem only comes to the surface at the worst moment , like when debts are not paid.
Let's show another example, let's assume that all these assets are placed in a box and divide it into 3 parts.
We would find truly toxic assets, like financial products based on loans that will never be paid such as car mortgages, credit cards, home mortgages and personal loans.
Unfortunately, we all know someone who lives far beyond their possibilities. That someone is our toxic asset creator.
So these assets, which the bank paid at 100, are actually worth almost zero.
A second type of asset that we could find are long-term assets, or assets that today may seem toxic but which in the long term can be of excellent quality.
Think of a credit given to a company, like your neighbor who works seven days a week in his engineering company, which despite being small is an excellent shop, which has just modernized all its machinery. This company will be burdened with a large debt but with new machinery and its good management, within a few years it will pay off the loan and be profitable.
If the economy starts to grow again this kind of debt will all be repaid, so they are good in the long run but are also potentially toxic if the economy stalls or worse collapses
The third part, on the other hand, is made up of good payers, the couple who lives in the apartment next to yours and who have just changed the car for a bigger one because they want to expand their family. They are both employees, so they have a stable job and this potentially puts them in the category of debts that are paid consistently and always on time. These are great assets. They are owners of credit cards that pay their debts, mortgages that are regularly paid off, etc.
Now let's look at everything in terms of the economy. At a time when the economy is in dire straits and slows down
The first group, toxic assets, actually has zero value.
The second group, the potential assets that the banks have paid at full price, begin to lose value.
The loss of value is not given by the payment problems by the debtors but because these assets are poured into the market because the banks have to cover their expenses and then sell them to make cash but the large amount of assets on the market causes the price to drop to a tenth of the initial value.
The second group would be an asset to be held but the banks need cash. Fast.
And the problem worsens as banks will have to account for these assets with their market price, no matter if the bank believes the value is 100. If the market prices at 50, this will be the value to be accounted for
The more pressure there is on the bank and other banks, the more they will have to sell these assets. Assets that are not toxic to payers, but toxic to the bank
As the economy continues to deteriorate, it is likely that the bank will also have to sell the assets of the third group, the best of the lot. This unfortunately in turn leads to a fall in the price of top quality assets and this means that even these become potentially toxic for the bank.
As you can see, everything is originated from the initial toxic assets.
Mining, staking and forging for noobs
We often talk about mining, mining farms and energy consumption of cryptocurrencies. But what is mining in 4 simple words?
As we have already read, the blockchain is made up of concatenated blocks, inside which data or financial transactions and payments are written.
In order to avoid scams, counterfeits or even tecnical errors in payments, the data contained in the blockchain must be verified and this is exactly what mining is about.
Mining represents the verification procedure that is carried out by exploiting the computing power of the computers owned by the individual miner or by the mining farm. A mining farm is nothing more than a place, often a warehouse, with a very large number of computers that work and produce blocks.
Once a block verification process is complete, the miner who created the new block will be paid for his verification work. Mining keeps the blockchain alive.
To validate transactions within a blockchain network There are several systems implemented to achieve consensus
A "blockchain protocol" is a common term for consensus methods.
Some of these require investors to purchase physical mining equipment, while others require no physical hardware and only possession of coins.
Let's see the details aboud different consensus methods:
- PoW: Proof of work - This type of consensus is generically called mining and consists in the creation of computational power thanks to mining rigs formed by serialized graphics cards. This computational ability solves the coin algorithm and creates the blocks. Bitcoin is based on this system, which is not particularly eco-sustainable.
- PoS: Proof of Stake - the type of consensus to create blocks is defined staking and is based on the possession of a large number of coins that, when placed in staking in one's wallet and therefore not available on the market, allow the owner to mine the blocks of this blockchain. Ethereum is based on this method, which is greener than proof of work
- DPoS: Delegate proof of stake this type of consensus for the creation of blocks is defined forging and is based on delegates voted by the community of coin owners. Lisk and rise work with this system, which is as eco-sustainable as proof of stake.
In DPOS systems, forging is another way to mine coins in order to validate their transactions and put new money into circulation. This system consists of 101 delegates located around the world who keep a node (server) online where the coin client runs.
This software allows you to maintain the decentralized network, validate transactions, issue new money into circulation and reward delegates for their service. Delegates don't have to be 101 but can be 51, 201, 301, 501, etc. according to the needs of the network. To become delegates there is a voting system based on the amount of money owned (stake).
If you want to become a delegate you need to reach a sufficient number of votes to be able to enter the top 101 (approval).
The DPoS (Delegated Proof of Stake) system is a method aimed at ensuring a network of digital tokens that takes place by processing transactions and achieving distributed validation inherent in the ownership of money without the need for a central authority.
This system represents an evolution that started from PoS (Proof of Stake), also developed in order to reduce costs and the inefficiency associated with the consumption of electricity typical of PoW (Proof of Work) systems, used for example by Bitcoin.
Mining how to do
This block creation can become a profitable business if done with the proper criteria. Obviously we are currently talking about large initial investments in material and hardware.
Before starting, however, we must understand that the two main problems you will encounter will be the exploitation and consumption of the hardware, which will shorten its useful life, and the energy costs given by the electricity bills, which will skyrocket compared to a normal household use. . After that it must be said that each coin is different and that some coins in particular require specific hardware.
Let's see how to mine
The first idea that comes to mind is to use our home PC, or an old laptop set aside in some dusty closet. Old hardware could be an obstacle to profitable mining given the possible low computing power if you use old hardware.
In this case, the mining of coins that are at the beginning of their life and that do not require particular computing power should be considered. But dont put to much hope in that solution.
A second solution can be to participate in a Mining Pool. Basically you participate with your hardware and your computing power in a group where other people gather computing power to undermine. The large number of devices made available means that the possibility of mining blocks in the blockchain is much higher and therefore potentially profitable. The proceeds will then be divided in proportion to the computing power made available. You will have againt the tipical two problems of energy cost and consumption of the hardware, and in addition there is the possible lack of transparency of the group of miners, who could remunerate the individual less than due, cheating him.
A third way could be to rent computing power through CLoud Mining services, services that provide dedicated paid packages for a defined period of time. Since you do not operate with your own hardware, the cost of wear and energy is reduced, but these are replaced by the cost of renting the computing power. In this case, however, there is the possibility of being scammed on the amount of coins that are recognized by the service for the same hashing power rented, a quantity of coin that over time becomes less and less, justified by the growing difficulty of extracting the coin.
Finally, a fourth way is to go big and create your own mining farm, with a lot of networked computers that mine our crypto currencies. In this case we are talking about very high budgets, well over 200 thousand dollars.
In this case, we must take it into our head to become entrepreneurs, so first of all we will have to think about locating the farm in a country with a low cost for electricity. Later we will have to think about what to mine, because for each coin or type of coin there are different hardware that are more suitable. Mining Bitcoin or ethereum is not the same thing. And let's remember that we have to mine a profitable coin, which is not so obvious today.
The supply of hardware for the creation of the farm will be a problem to consider given its possible scarcity and cost, and also its replacement given the premature wear that we will encounter.
We will also need at least one or more professionals dedicated to the management and replacement of parts.
Since the farm has to operate 24/7, it will be a long and demanding job. Creating a farm is not easy and not always profitable, in fact these are general indications. Many farms have been opened and closed in a short period of time not only due to the inability of the entrepreneurs but also due to the volatility of the market. It is a difficult market and it is necessary to have very in-depth specific knowledge, both in the technological and in the economic field.
Cryptocurrencies to be mined.
If you have decided to dive into the world of mining, you must know that it is important to carefully choose which currencies to focus your efforts on, in fact, depending on the currency chosen, mining may require specific hardware or even more or less power. Furthermore, with a view to evaluating the investment, it must be considered that the trend in the value of the currency (heavily influenced by the progress of the underlying project and the size of the community) affects the results.
What if the miners suddenly stopped?
What if miming no longer generates profits? That is, what would happen if the revenues did not cover the costs of the equipment and the electricity used and the miners decided to stop or switch to another currency? Is it true that without miners, Bitcoin would stop working or become too slow?
No it does not. a blockchain continuously adapts its criteria to keep the creation rate constant. If there were 90% fewer miners, then 90% fewer calculations would be needed to approve a new block, and the operation would not be affected.
The absolute value of the reward for a new block decreases over time, all programmed according to the rules that govern Bitcoin. During the first 4 years of its creation (2009-2012) the reward was 50 bitcoins
However, in the event that the miners all stop their activity, the blockchain would stop and consequently it would no longer be possible (until the mining activity is resumed) to carry out any transactions or add blocks to the blockchain.
Learn more about Mining from an investor perspective here.
Derivatives
What are derivatives ?
Derivatives, as the name implies, are financial instruments that derive from something and have become famous in mainstream media after the financial crisis in 2008.
Derivatives normally have the function of insurance or hedging and transferring the financial risk between two parties.
This category can include any instrument whose price is based on the value of another asset, defined as "underlying" (such as, for example, shares, financial indices, currencies, interest rates, commodities
We can explain the derivatives with an example
Luca is a guy who has a family tradition. For the Christmas lunch in his very large family they consume 10 swordfish for a total of 200 kg of fish.
The tradition has lasted for years and Luca is in charge of supplying the fish.
It happens, however, like the year before that Luca had difficulty finding fish to continue the family tradition and mindful of all the extra work done the previous Christmas, for this Christmas he wants to be prepared and never repeat the bad experience.
Then Luca moves in search of a large fish farm in his area and contacts the farmer.
Luca asks to the farmer if he can assure him the supply of fish for next Christmas. The owner is not convinced, but offers Luca to buy the 10 swordfish in advance.
If Luca pays now, the owner guarantees him the supply of the 10 fish.
However, the price will fluctuates through the year, so they agree on a total price that satisfies both of 100 euros.
The owner of the farm then creates a note (IOU) equivalent to the value of 100 euros for 10 fish that can be collected when the owner wishes by a certain date before Christmas.
What we have now is a contract, an agreement that is derived from what is his underlying, in this case the purchase of swordfish, with an indicated quantity within a period of time
So the derivative is a contract based on an underlying.
There are 3 types of derivatives contracts:
The first is the future forward, which is essentially our example, that is the delivery of 200 kg of swordfish in the future.
The second type is called option, which is a future as previusly but with the option to buy or sell.
In the example given Luca may be worried of the risk of not having the fish or farmer may not be 100% reliable.
So Luca protects himself with a purchase option with another breeder, and pays 20 euros for the right to buy the 200kg of fish before Christmas.
So Luca will have this purchase note for the 200kg of fish and he now has the right to exercise this option before Christmas.
Luca therefore now to be absolutely sure of having these 200kg of fish has opened a futures contract with the first farmer for 100 euros and in addition he protected himself from any problems with an option with the second farmer.
An case all goes well with the first breeder, the option will simply expire and be forgotten.
The third type is called SWAP.
It is applied to instruments that have variable interest over time, so if you want to switch to a fixed rate, the bank will take the risk of the spread between the two rates, trying to earn from it.
The underlyings of this type of derivative can be commodities, interest rates, credit rates, etc.
The interesting thing about derivative contracts is that they can be traded and are traded on exchanges or OTCs (i.e. face-to-face agreements between people)
In our example it could happen that Luca and his family have to skip Christmas lunch.
Knowing this, Luca can sell the purchase contract to a friend of his, who could offer him 80 euros for those 20kg of fish.
In this case Luca would lose some currency but he would not have to withdraw the fish and would have recovered part of the money spent.
Otherwise, it could happen that swordfish is nowhere to be found that Christmas and Luca could sell the contract for those 20 kg for 200 euros, displeasing the family but making an excellent gain.
What is important in derivatives is the contract and not the underlying. The underlying is a problem when it creates a toxic asset with the derivative, as we explained in our video dedicated to this issue.
Luca in our example is absolutely not a risk, the risk for Luca is the first breeder.
In the event that all the fish died, Luca would remain with the only contract without validity and without fish and for that he is covered with the option.
Tax Havens
Today we lie down in the sun in full relaxation and talk about tax havens.
A tax haven is basically a low or no taxation country for resident businesses or individuals. They are considered refugees from states that have exaggerated taxation.
Generally the banking system allows transactions to be carried out that are covered by banking secrecy and the administrative management for the creation of companies is very quick and lean.
It must be understood that if tax havens exist, tax hells must exist somewhere.
Are tax havens legal? Yes.
Are tax havens fair? It depends on what our point of view is, which is obviously linked exclusively to companies operating in sectors that has no link to criminality.
If we look at the large sums being taken away from high-tax states, it is clear that tax havens are unfair. Countries like Panama don't have the needs and expenses of normal European countries. Companies operating in high-tax countries benefit from the state services of these countries and therefore should remunerate them.
From the other point of view, however, it is easy to understand that a country with low or no taxation gives to any company a competitive advantage given the saving of money from taxation, money that can be reused in research and development, higher salaries, bonuses and all that. which is needed for company and employees.
Another interesting point to understand is that there is now a competition between nation states in the world of globalization. There have been those who are administratively friendlier to companies, which offer greater advantages and which encourage companies to put their offices there. Places like Luxembourg, the Netherlands or Ireland have understood this dynamic and built a competitive advantage. Other countries, on the other hand, which have inefficient and expensive state welfare systems, are forced to over-tax their citizens.
In today's world, where competition is getting stronger and many barriers have been destroyed, it is easy to understand that every competitive advantage need to be used. States and governments that do not understand this are destined to lag behind on the international scene and with them their economies and the prosperity of their citizens. Being more inclined to favor companies by lowering taxes and bureaucracy, improving and decreasing the state machine, could be the ideal solution to make sure that tax havens no longer exist.
Renting or buying a house?
Renting or buying? Buying or renting?
And is renting really a complete waste of money?
In fact, the question that many are asking is "why pay the rent to the homeowner if I can pay for my home directly?"
To answer this question we must start from the beginning of the question and analyze the situation one piece at a time. And the only thing that makes sense is to analyze the problem over the long term.
First of all, renting a house is not throwing money into the fireplace, but it means having the use of an asset, in this case a house or an apartment. you are paying for the use of space that has no value to you in the future. This concept is basic, the value in the future is the key.
When you buy a house, and in almost all cases you are buying it making debt with a mortgage, you are borrowing money instead of a property and therefore you will pay the debt first, and then the interest for the use of this liquidity.
It should always be remembered that the money you borrowed today is used to buy an asset that will hopefully increase in value tomorrow.
It should also be considered that when the bank makes you a loan, you do not always have all the necessary money for the lend since not all banks provide 100% loans. So you will need to have a place to live for this period.
Another point to be sure of is what is expected in the short term. If you work in a company that sends you around the world, does it make sense to buy a house? If you change jobs and cities often, does it make sense to buy a house?
Being the owner of a house when you decide to take root and create a family is beautiful, but all the expenses that a property entails must be considered, therefore ownership taxes, purchase taxes, writing taxes, possible breakages of part of the house, checks to do at home, management fees and services without having to talk about house bills.
Those who are renting, on the other hand, have only the cost of the rent, insurance, various expenses and bills. And a much easier chance to move if the area gets worse or coexistence with neighbors becomes impossible.
Remember that needs and requirements change over the years, especially if the family grows with one or two children. Buying a house for two people and then having to live there in 4 is not easy but living there 35 or 40 years is certainly more economically viable than living in rent for the same time, especially because after 40 years you will be the owner of a property that will have a value.
But think about how many things can change or go wrong in 40 years, think about the divorce rate in your country.
The issue is difficult to tackle on a general level since each of us has different ideas, ways of life and expectations of the future. The real estate market is a market that must be studied and understood like any market and which is subject to price fluctuations. Many personal factors need to be considered before making the final decision.
Buying a house is simple, much more difficult is having to sell it. Always without falling into the debt trap
Diversification
Today we will understand how diversification works.
Diversification is an investment strategy to lower the risk factor on the markets and the global economy. You must always remember that the stocks or bonds you buy on the market are issued by companies that work, produce, take risks and make mistakes.
Only those who do nothing are never wrong o never make mistakes.
These risks and errors can be of various kinds, from the administrative level to company management or they can change situations or laws that outline the correct policies regarding companies in a given territory. Many of these issues are visible with a long-term view, but very often it happens that problems suddenly fall out of the sky.
So a common sense strategy might be not to put all your eggs in one basket, but to have your money invested in various companies, so that an attack on one company doesn't cause you to lose all your money.
This is to reduce the risk of the portfolio.
This kind of strategy works best only when your asset position arent correlated, that it means that a financial asset is affected to rise or fall in price, due to the rise or rise in the price of another financial asset. To take an example, think of the value of gold and the value of mining shares, or of oil and the shares of oil companies.
If you want to understand if your investments are uncorrelated, look for some tools on the internet that can help you.
A good general way to diversify is to invest in different industries in different sectors.
Given that each sector encounters different and unique risks. The same goes for when we think about different countries or continent. Different countries have different risks and problems
Globalization has helped us with the possibility of investing our money in different countries of the world, but this has meant that the correlation between the various companies even from different continents increased, just think of how Western companies are only linked to the supply of raw materials and semi-finished products from Asia.
Diversifying is not a quick and easy strategy, quite the opposite. We need to spend a lot of time studying the various issues and then studying the various companies that may interest us. Creating a risk-free portfolio is nearly impossible but doable.
We will then have to be careful about the costs of creating the portfolio given the amount of positions we could open.
ETFs are a good choice, but that's your job. Study and choose the best for you and your family's financial life. Remember not to run into a false diversification by buying different assets but which then have the same underlying.
Always remember that your goal is to safeguard the account, avoid large drops in its value and limit volatility by controlling risk.
Dividends
Today let's talk about what dividends are and why we like them so much.
Dividends are funds, money, that companies give to those who own their shares. Generally speaking, we do not talk about very large figures per share, but having so many shares the figure begins to be interesting.
In fact, owning this kind of shares leads to having extra cash flow in our account. A gain is not only made by buying and selling the shares but also by owning these dividend-paying shares.
Now, the first thought that comes to mind is that a stock portfolio can only be made up of dividend-paying stocks, but you have to be very careful. In fact, it is a good strategy but it has inherent problems.
Theoretically, companies pay dividends when they think they cannot increase their earnings by reinvesting in the company. Very often dividends are used as a tool in the hands of companies to remunerate part of the management and part of the corporate stakeholders.
This is why dividends are paid more easily by companies that have been on the market for some time and not by new companies that need to reinvest in themselves or that do not even have this liquidity.
The corporate sector also plays a role in paying dividends. some sectors are more inclined like the energy and oil sector, where only it is easier to create long-term contracts with sovereign states, with large and certain cash flows. These are stable operations in a "slow" market.
The companies of the new economy instead work in a very fast market, much more fluid and with big technological changes that does not lend itself.
Dividends can be a great solution for income investors, like those who invest to get money into their portfolio.
The risk management of dividend stocks is slightly different from others. In fact, one is led to think that companies that give dividends are more disciplined, giving a sense of security to the investor. In this way, the investor himself has a management that can be simplified having a certain annual return.
One of the possible strategies with dividends is to reinvest buying other stocks that will pay more dividends and so on for years to come.
It must be said that having a dividend-only portfolio is an interesting idea, but we must also understand that to have interesting figures we will have to immobilize an important figure on the stock market, which is notoriously risky and volatile. Stocks can crash and companies can make mistakes that can lead them to eliminate dividends. Unfortunately, the market does not appreciate this move and that company's stock could suffer a further collapse.
Dividend stocks are attractive but should not be abused.