SQUID GAME AND INVESTING!

Have you watched Netflix's hit series: Squid Game?" I recently watched Squid Game where 456 debt-ridden individuals were risking their lives playing children's games for a huge cash prize. It shows the reality of how sometimes human lives are not valuable to some.?

One parallel I could draw to investing was the game with the shapes in episode 3 where the banker Cho Sang-Woo, a star in his community who stole lots of money from his clients lost it all in the market, told his team to choose a different one. One might say he was trying to improve his chances while eliminating others. The four shapes were circle, triangle, star, and umbrella.

Choosing a different shape is analogous to not putting all one's eggs in one basket. This is diversification. Once the game was revealed, each shape carried a different level of difficulty. I draw this to different asset classes one can invest in.

·?????The circle represents cash and equivalents. This carries the lowest risk for maximum safety

·?????The triangle represents bonds. This can range from government bonds, municipal bonds to corporate bonds. They range from low to medium risk.

·?????The star is equities. They are riskier than bonds. Also ranges from equity funds to individual stocks.

·?????The umbrella is the riskiest of them all. These are alternative investments ranging from futures, options, private equity, etc.

Spreading your risk by allocating certain percentages of your asset allocation according to the above will give you, in a long term, high returns with low risk. This is because the different correlations between these asset classes will lead to an overall reduced risk of the portfolio and increased return.

Not only is diversification across asset classes important, but we also need to consider diversification across geographies and time.

Diversification across geographies is important because of one of many reasons: inflation.

For example, inflation in the US is currently 5.4%, France is currently 2.7%, the UK is 3.2%, and Germany is 4.1%. With an increase in inflation comes the potential increase in interest rates. These ultimately affect stocks and bonds in different ways. One can look at geography where there might not be an increase in interest rates and diversify by investing some of your money there.

Diversification across time is similar to what we call dollar-cost averaging. This is when you invest regularly thus reducing the effects of buying investments at the wrong time.?

Investing broadly by diversifying across asset classes, geographies, and time is essential.

Investing can be very emotional and we need to be aware of the biases that we might exhibit when investing. Regret aversion is an emotional outcome in which people tend to avoid making decisions that will result in action out of fear that the decision will turn out poorly. Regret from an action taken is called an error of commission, whereas regret from an action not taken is called an error of omission. The losses can put people off investing for life.

25 years ago, when Deutsche Telekom's IPO, it was the first time for many German investors. It also became a traumatic experience as identified in this article. The issue price was DM 28.50 (the equivalent of 14.57 euros). The stock went to as high as 103 euros on the 6th of March 2000 and was less than 10 euros each in June 2002. Today it is trading around 16 euros, which is not bad.

While a lot of people sold their shares when the price went down, some held on. All investments rise and fall, the key is to stay invested over a long period and this includes rocky periods. A lot of Germans that invested in Deutsche Telekom's stock are significantly less active in the stock market than those that did not hold the stock as identified in the article.

Investing in the long term is very important because it lowers the risks of a bad outcome. In the longer term, risks in investments even out.

Long-term investing in pension planning is very important. Whether you are starting in your career in your 20s or you are in your 50s, you still have a long-term horizon and very low liquidity needs to invest in your pension. You may be behind schedule, but you can and should start now. Using a combination of savings and investments, you could end up pleasantly surprised with what you can accumulate in just a few years. Of course, the more time you have, the better, but there is no point in dwelling on the past.

Financial education is key to understanding the risk and rewards of investing in a longer-term. A lot of people wait to seek financial help/ guidance or none at all until they experience a financial crisis related to debt, cash flow, unexpected expenses, or job/income loss.?Employer-provided financial education to talk about wealth accumulation, retirement, and bolstering financial security in retirement are very important. We also need to make personal finance a required course at colleges and universities. This will teach students the benefits of risk diversification, inflation, investing in stock markets, etc.

Investing by diversifying across asset classes, geographies, and time is not a lose everything scenario like Squid Game. Depending on our financial goals, risk tolerance and ability, time horizon, liquidity needs; our percentage allocation across circles, triangles, stars, and umbrellas will differ.?Most importantly is to start investing and investing on a longer-term basis to even out the volatility – ups and downs of the market and not sell too low and buy too high!

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