PHNOM PENH - It is often said that the electorate votes with its pockets. In other words, they choose their presidents and prime ministers based on how much money governments put in - or take out - of their pockets usually in the form of taxes or tax cuts.
In this year's United States presidential election, there has been much speculation as to who is better for the economy and who is better for middle-class America's pockets - Barack Obama or John McCain. There are those who favour Obama and those who favour McCain. And while some say that Republicans are generally better for stock markets, others argue that it's actually the Democrats who have a better track record. When it comes to presidents and the economy everyone has an opinion!
However, when it comes to personal finances, we should not rely on the politicians and their actions. While their policies do have a bearing on the overall economy, it's what we do today - regardless of who is in the White House - that will have an effect on our personal wealth and ultimately our own future in 10 years' time. So instead of looking to President-elect Barack Obama for a financial fix, let's look to ourselves and the plans we have in place to make sure that they are on track.
To begin with - as we are already aware - we need to follow a few basic guidelines :
- Know our objectives/know our risk tolerance
- Invest for the long term
- Keep a diversified portfolio
- Monitor our investments
Armed with these key guidelines and the miracle of compound interest, as well as dollar cost averaging, we will be well-placed to grow our wealth and achieve our financial objectives - even with a new president-elect!
Compounding your returns
Dollar cost averaging allows us to spread our investments over a period of time with regular investments (usually at set intervals), thus reducing the risk of sharp falls - but taking advantage of the cheap stocks and units.
The basic principle of compound interest is that interest is earned on interest. And when money remains invested it can have impressive results.
While obama might bring some short-lived respite, we are likely to face continued market swings.
Whether mathematical genius Albert Einstein actually did call Compound Interest "the greatest mathematical discovery of all time" is subject to much debate - especially on the internet. However, one thing for sure is that it is an ideal way to grow your wealth by earning interest upon your interest.
When it comes to calculating what exactly compound interest can do for you, financial experts often use the Rule of 72. Seventy-two is the magic number that calculates how long exactly it will take to double our investment.
For example, let's take a US$500 invested at an interest rate of nine percent per year. How long would it take us to turn this $500 in to $1,000? To calculate the number of years it will take to double this investment, we simply divide 72 by nine. This will give us the exact figure of 8.04 years. This means that it will take about eight years to turn our initial investment of $500 in to $1,000.
So instead of worrying what the president-elect will do to the economy, let's stick with our own personal financial plans. We should remember that no matter what an administration does or does not do the economic cycle will continue. And right now it just so happens that we are in a downward trend - which is likely to continue. Such a cycle is a natural part of the economy and one that will provide the correction that the markets might need. And it will not last forever!
Right now we are facing a period of extreme volatility - brought about by uncertainty. And while Obama might bring some short-lived respite, the fact of the matter is that we are likely to face continued market swings. With this in mind let's try to take control of our own financial futures and stay focused on our overall objective of growing our wealth over the long-term so that we can achieve financial freedom and our desired lifestyle in the future.
After all, Your Money Matters!
Trevor Keidan is managing director of Infinity Financial Solutions, a firm providing impartial, tailor-made personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor, please send an email to [email protected].