The low risk plan Part 2.

The low risk plan Part 2.

Read Part One

 

Financial Planner

This time last year I went to several financial planners and they generally fall into two categories. Those that sell you products they make money from and those that pretend they don’t and charge a fee upfront.

 

I decided then, I would work my finances out for myself and this post is a continuation of that theme from last year and includes my understanding since then. (These original posts are on this blog about a year ago).

 

The aim of a financial plan

The aim of financial planning for me is to create a plan that involves growth of assets to a level that I will be able to live my life in the manner in which I choose, have enough income from assets as soon as possible to enable me to stop swapping time for money and to leave a sizeable fortune to my children to ensure they don’t have to go through the same journey of swapping time for money.

 

Key values in working out a plan

 

Inflation

We can take the average inflation value to be 5.8%*. This is equivalent to the amount that money devalues mainly because the government keeps printing more of it.

See http://en.wikipedia.org/wiki/Inflation

 

* The cost of inflation is taken to be 5.8%. This may seem like a high number at this moment of low inflation, but this has been calculated based upon the average inflationary rates since 1946. (See http://www.whatsthecost.com/historic.cpi.aspx) for details. This means that although each year may be inaccurate, especially as we are in a recession, we are interested in the long term plan, this should average out correctly over the long term. (Long term being 40 years).

 

Interest earned on cash in the bank

The average rate of return on money invested in a bank can be calculated by taking the value of £100 invested in 1946, the value of that money now and working out the average compound interest rate in the money was compounded on a year by year basis.

This raw information came from

http://projects.exeter.ac.uk/RDavies/arian/current/howmuch.html

and the chart

http://www.orkneyifa.com/UK_Financial_History_Chart.pdf

 

I calculated that the average rate earned on cash in a UK bank is 4.7% annually.

 

Cost of living

The first step for me was to define how much money I require on a monthly and hence a yearly basis. I worked this out by going through the last six months bank statements, cancelling everything that is not essential. I then added up all of the ‘fixed outgoings’ and the ‘variable outgoings’. Fixed outgoings are the things I can’t change such as my rent, my phone bills, my council tax etc. Variable outgoings are the things I can change such as how many clothes or CDs I buy.

 

I worked out my fixed outgoings are £2700 / month and my variable outgoings need to be in the region of £400 for me and £400 for my wife. That is a total out going of £3500 per month.

 

This is my baseline. If I can achieve that much income from assets I can stop swapping time for money and concentrate on building assets full time.

 

Emergency Cash

The next thing is to build a buffer zone of cash to allow for any disasters or difficult circumstances that stop my income of cash. This is a small amount of money that is stored as cash for quick access. For me this is to start with the equivalent of 6 months times the cost of living and I would like to expand that slowly to be at least a year.

This is a simple calculation:

 

6 months x £3500 = £21000.

12 months x £3500 = £42000.

In the next post, I will write about how this emergency cash fund depreciates due to inflation and work out how much each year needs to be added to keep the fund covering 6 months.

 

 

The low risk plan

For the month and a half I have been working very hard to build new clients for my business as well as trying to find contract work to work for someone else to bring in some cash. I even tried applying for a permanent job or two.

I have not experienced a recession before and there have been some very scary moments as no contract offers and no client work have been forth coming, and the savings are running desperately low. It is at times like this that you realise how exposed you are with no assets and the income dries up. I decided that I had to do something about this situation and not let it happen to me again.

I have taken this time to put together two plans. One is a general very long term plan and the other a short term plan which covers about a year.

Over then next few days, I will share my financial plans and the though process behind them to becoming obscenely rich. Many of you will be disappointed to hear it does not contain any share dealing, FOREX or spread betting. This is a my steady minimal risk plan of becoming financially free.

If you have been following this blog since the beginning or if you care to read back, you will see that it all started when I read the Rich Dad, Poor Dad series of books. The first thing recommended in that book is to make a no risk plan. Its been over a year now since I started this journey and I have mostly focused on the higher risk plans. Now it’s time to get back to basics, follow the advice, and make that long over due no risk plan.

After reading those books last year, I sought out a Financial Planner and none were up to the job. This year I decided to do it with no help from the professionals and now I have completed my plans I don’t think anyone really needs them.

The plans will follow over the next few days.

 

My time in the public sector

My time in the public sector

Being in the IT industry one hears stories about incompetence in the public sector, but I can assure you, none of them measure up to actually how incompetent the public sector really is.

I recently completed a short contract for the NHS and spent my time working with the board of the trustees, the IT department and the department of Information. It was quite shocking how the staff at all levels of the organisation are primarily concerned with passing the buck and making life harder for others because of some petty gripe for procedure.

I sat in a meeting where one of the managers actually asked the team how he could make life harder for other members of staff who had not followed his protocols. Other members openly discussed innovative new ways of saying no to genuine requests for support.

The board itself, stated they didn’t care if what we were doing made life harder for staff, they just wanted the project done because they had inadvertently promised it to someone else.

We even had one example where a six month project, that produced nothing, was supposed to have produced a whole new set of reports. These reports it turns out were already being generated by other members of the manager’s team and the project that went wrong would only have duplicated work if it had actually worked.

The upshot is millions of pounds of tax payers money wasted on nothing.

It seems the NHS is being held together by a minority of very hard working people carrying the buck for the majority. These key individuals are not recognised for their hard work and incompetent members of staff are promoted over them. HR recommended about one employee who consistently failed to do what was asked of him, was lazy in his work and did not have the right skills to complete tasks assigned to him despite numerous training courses, to promote him up the ladder until he could not achieve his job. Surely this must be illegal?

My opinion of the NHS has swung back to privatisation. When I hear both parties calling for more funding for the NHS, I shriek in horror, as it is just more money wasted. The only way to save the NHS is to sack the whole lot of them and start again.

 

Mathematics – Differential Calculus

 

I am learning about differentiation (calculus) to work out derivatives at the moment. The maths I am learning is all about various different things in the economy, business and personal finance.

 

I previously wrote about compound interest in the post:  First order linear recurrence and compound interest from the book ‘Mathematics for Economics and Finance’ by Martin Anthony and Norman Biggs.

 

I am not learning about derivatives, the number e and logarithms.

 

I find it quite amazing how the trick of differentiation works where if you have 2x² and find the derivative it becomes 4x. By multiplying the first number by the power and then reducing the power by one results in the derivative.

 

What are the chances of that? We live in a strange world.

 

The derivative is the change in the function at a given point. You might imagine the different between two points on a curve. The average rate of change of the curve is the gradient of a straight line between the two points. As the two points get closer together the gradient becomes nearer the rate of change at a single point. Calculus allows us to work out what the rate of change is at that single point.

 

Reference:

 

Wikipedia: Calculus (in particular look at the heading Differential calculus)

 

FXCM trading the FOREX.

 

Not a bad little trading system. I have been using it for (apparently) one month. I am quite happy with it but the practice account only lasts for a month unless you have a proper account with them.

So, I am still looking for a practice account, preferably with spread betting, for the FOREX where I can place trades on live data but with ‘virtual’ money.

 

Anyone got any ideas?

 

Next steps on the journey

 

For some time I have been deliberating about the next course of action. The last post relating to this was written on April 5th entitled ‘Exposing a larger surface area to increase opportunities‘.

 

I have managed to secure a basic I.T. contract working in the client’s office that allows me to pay the bills. This contract is a junior position and hence does not require me to be responsible other than to do the work at hand. The hours are 8am until 4pm which allows me to get back to me office before the working day ends. The money suits the position and wont get me rich but it does provide me a ’status quo’ on the cash flow situation enabled me not to slide into debt.

 

Now that outgoings are covered. I am focusing on winning business and building the company by following up on prospects that did not come to fruition due to the recession. I have noticed that since April the number of inquiries and opportunities have risen and I expect my company will have enough business for me to work full time on it very soon.

 

I am working on a proposal for a very large company at the moment and if that works out, we will be back in business.

 

I have been trading using a demo or practice account (see previous post). My trades are winning and losing and I have been bouncing around my start capitol so far. So no where near making a living from trading.

 

I am learning a lot about economics at the moment in particular about supply and demand and the maths behind the market. I can already see this shaping the way I think about the business world and changing the way I make decisions. I’ll write about this in a separate  post.

 

So all in all, I have covered the downside, working on the upside and making sure I am exploring opportunities and learning.

 

Life is good.

 

FOREX USD/ CAD ascending triangle

 

The chart for USD / CAD pair has made quite a nice ascending triangle on the day chart. (See image above).

 

I have entered a trade at the bottom of the triangle going Long to catch any rebound to the top of the range.

I have set a stop just below the support at the bottom of the triangle and a limit just below the top of the resistance at the top of the range.

 

I have also entered an entry order at a distance of the ATR below the range SHORT to catch any breakouts going in that direction and also an entry order going LONG at the ATR distance above the bound range.

Both entry orders have stops at the range points in case it is a false breakout.

 

So in most cases, I should be in for a winner, unless I get a false breakout SHORT and a false breakout LONG.

 

This is a multi day trading strategy and I expect this trade(s) to last for several weeks.

 

Free practice Forex trading accounts

I have across and nice application that is free and allows you to trade FOREX major currency pairs in real time in a practice environment. It is from FXCM.

 

You can download their software for free without having to sign up giving your life story and all your important documents. The trading and charting environment is good as well.

 

You can trade right from the charts at the point where you click on the chart which I like too.

 

Does anyone know of a practice FOREX spread betting account that you dont have to send off your passport etc to?

 

 

The url is http://www.fxcm.co.uk

 

It is not spread betting, but the principle is the same with long and short capabilities in amounts in multiples of 10k lots.

 

I started with £5K virtual money on Monday and it’s now Thursday and I am up using the strategies I know from trading stocks and from the book ‘FOREX, patterns and probabilities‘ by Ed Ponsi.

My account is now £117 up which is just over 2% in four days.

 

The book is quite good and I would recommend it for anyone who is starting out trading in FOREX and needs a refreshing or wants to learn the standard strategies for technical analysis as they relate to FOREX.

 

First order linear recurrence and compound interest

 

I am reading and working through the book ‘Mathematics for Economics and Finance’ at the moment by Martin Anthony and Norman Biggs.

 

I am learning the mathematics that is detailed in the trading course ‘Certificate in Quantitive Finance’ to prepare myself both for working in finance and building my trading platform.

 

At the moment I have just learnt about First order linear recurrence equations and how this relates to working out capital gained on compound interest in an account with a constant percentage rate.

 

I have always worked this out before in Excel with arduous calculations for each year, now I have the maths to do it for any year in one calculation. It is quite a buzz to see the power of mathematics at work in real life.

Why didn’t they make it this interesting at school!

 

Standard First order linear recurrence  for compound interest can be expressed in maths as:

 

y_{t =} ay_t-1 + b

 

where y is the capital at year t, a is (1 + r) where r is the interest rate as a decimal, and b is zero.

 

This gives

 

y_{t =} (1 + r)^ty₀

 

or Capital after t years = (1 + r) to the power of t multiplied by the initial capital.

 

If the equation is reversed, then we can see how much we need in the bank to achieve a target t years in the future.

 

y₀  = y_t / (1 + r)^t

 

or

 

capital needed is the desired target amount divided by (1 + the interest rate) to the power of the number of years.

 

Easy as pie!

 

Exposing a larger surface area to increase opportunities

 

I was thinking about opportunities and how they arise in the bath last night and just like Archimedes in a similar situation over 2000 years ago, had a Eureka moment.

 

Opportunities are always there. It is a matter of seeing them. So how to see more opportunity. This was the question playing on my mind.

 

I deal a lot with writing secure web applications (when work is around!) and the key thing about security is to reduce the amount of what is a termed as ’surface area’. This is the amount of interfaces, or aspects of the program available for people to look at and potentially attack. By reducing the surface area, you are reducing the points vulnerable to attack.

 

The exact opposite is required when looking for opportunity. One must open up your ’surface area’ or entrepreneurial activities to ‘catch’ opportunities as they arise. This is akin to expanding one’s awareness.

 

I have reviewed my ’surface area’ in terms of points at which aspects of my life are open to making money. These are points such as running a business or trading. There are also ideas I have to make money, such as a video commerce idea and affiliate selling online. All of these concepts or actual activities are areas where I am open mentally to making money.

 

By taking all of the ideas and putting a very small amount of effort in to increase their potential in the market place, making people aware of them, I am increasing my surface area and potential for spotting opportunity.

 

I am now working out a plan to sew the seeds of some of these ideas and see if any opportunities come back.

 

FOREX back data for the major currency pairs

 

As you know, if you have been reading my posts, I am embarking on a journey to write my own trading system. I am focusing more on FOREX at the moment and I am looking for somewhere I can find back data for FOREX currency pairs, preferably every minute of data or thereabouts for the last 6 months.

 

Does anyone know where I might find this?

I imagine it will be a big download, but that is not a problem.

 

Any help much appreciated.

 

Financial difficulties

 

 

Closing a business is much harder than opening one. I have several service contracts that I signed for third party companies to supply me services for the company.

 

Now the business has run out of money, I have tried to negotiate a closure for these contracts. Some people have been reasonable and wished me luck and others have been very difficult and unreasonable.

 

The worst company is an SEO company who supplies news stories in the form of an XML feed to your website. This company is called Direct News, which is part of Adfero. I signed a contract with them last year with a 3 months notice period for termination in it. I wanted to delay the start of this contract by 6 months and so that contract was annulled and a new contract with a new start date was provided.

 

What I didn’t realise was they had changed the termination clause from 3 months to one year.

I admit this was my mistake not spotting this change, but I signed the new contract and now the business is going down I tried to cancel the contract they have refused to terminate in less than one year.

 

I even offered them 3 months payment for no service, but they have been really unreasonable and have demanded full payment.

 

I am seeking advice on how whether I can win a case against them for them misrepresenting the new contract by not highlighting the change. They say they pointed this out in the meeting but they did not, unfortunately there is no record of this either way, so it is their word against mine.

 

The total outstanding amount for all three remaining months is about £7500. What is really annoying is that the news has never really done anything for the company either!

 

A good lesson has been learnt here on my journey to being a successful businessman and that is ‘Trust no one’, ‘Read the contract’ and ‘cover the downside’.

 

 

A cunning plan

 

 

I have had a couple of weeks to have a think about the next step to becoming obscenely rich.

 

Weighing up my love and fascination for trading and the freedom that this would allow, and coupled with my 12 years experience in coding software and my ability to learn new things very quickly, I have decided to find a job that will teach me how to build trading systems properly.

 

I have been talking to some of the recruitment agents in this area and have found that the way to get into the serious banking / trading environment is to have experience in that environment. This is of course a chicken and egg situation. So, how to crack it.

 

It is possible or easier to get a position with a banking subsidiary company that would offer this experience, or take a full time job in a bank earning less and go in as a more junior position that I would be used to.

There is also a course I have been recommended that teaches about Quantative Finance. This course is expensive (Around £10K) and takes six months to complete in the evenings, but comes highly recommended and teaches the complexities of this type of trading and the certificate might open doors into a bank’s trading floor.

 

You can find out more about this course here.

 

So, I have dusted off the old CV, and sent it to some of the agents and see will see what happens.

 

In the mean time, I have decided to find any I.T. contract that pays well to get me out of my financial difficulties.

 

There seems to be a fair amount of maths involved in building the trading systems, and luckily I have some experience of this as I did a physics degree. I have forgotten most of it, but I am going to start re-learning some of the calculus etc ready for the next step of building my own system.

 

I ignored this before and used the methods in ShareScript to generate the numbers I wanted. Once I understand more about what is going on underneath, this should help me achieve a greater understanding of patterns and randomness in trading.

 

I am also reading and learning more about FOREX trading in general and am reading the book ‘FOREX, Patterns and Probabilities’ by Ed Ponsi. It seems like a good book and I’ll write a review of it once I’ve finished.

 

 

 

What’s next?

What’s next? 

For anyone who has watched ‘The West Wing’, you know what I am talking about.

What’s next?

 

The business is 99% over. I have a few things to clear up in terms of contracts etc and also there are still some prospects out there that may come off at some point, but nothing immediate.

 

This leaves me with the greatest asset of all. Time.

I now have all the time in the world, the rest of my life ahead and I can do whatever I want.

So what to do now.

 

Well, I have learnt a hell of a lot since starting this journey a year ago, perhaps a good place to start would be to see what I have learnt and use this to form a new business plan.

 

1. I have learnt a lot about the markets, trading (both share dealing and spread betting)

 

This is mostly to do with technical analysis, the mechanism for trading, the importance of having a trading system and risk management.

 

2. I have learnt a lot about running a proper business, getting sales and productising ideas to sell to potential customers.

 

This is mostly about keeping costs down, being creative, taking that idea and making it commercially viable and then selling that idea to someone who then pays for you to build it.

This is great in a growing market, and extremely difficult in a shrinking market (as I have found).

 

3. Property would be great to buy now, but I don’t have any cash. Have not explored this avenue yet.

 

4. I love the flexibility of running my own business and the fact that this allows me to spend time with my family when I want to.

 

5. I like being the boss.

 

6. Not many of my friends understand this way of life and in fact some don’t even like to talk about it. (I had one friend who took one look at the very first paragraph of this blog and switched it off quickly as if the thought of discussing making money through assets was somehow unclean!)

 

7. I don’t mind using the telephone to call people up

 

8. I like working on my own as well as with others

 

9. Spending money is a good way of losing money not making money.

 

10. The most important aspect of anything is to have fun!

 

Into the pot, I could also throw that I need some cash in the reasonably short term to carry on paying my expenses.

 

There are some options in order of what I am thinking I might do next:

 

1. Get some contract work which I can do quite easily which is high paid and short term to build cash reserves. The downside of this, is it is back to working on someone else’s asset, the advantage is low responsibility, short term and high cash.

 

2. Go back to working on freelance work form home. The advantage of this is that I can manage my time as I like so I can keep open for opportunities, work from home to see my family more, but the disadvantage is I am not building assets and the cash is a lot less than contracting work.

 

3. Carry on with the business as a background task to keep up with the prospects we have made, pursue any low cost / low time prospects as they might arise.

 

4. Come up with a whole new business idea

 

5. Learn more about trading in its various forms and make a living through that

 

6. Carry on learning and come up with another method of making some money

 

I am going to think about this over the next few days. I have been testing the water with contract work and there still seems to some of it about although not as much as a few years ago.

 

I’ll let you know how it goes.

 

The end of an era?

 

I have been banging on doors now for nearly six months trying to get some sales for the business and have finally given up the ghost of this incarnation of the business. My cash is all but depleted and I have closed the office and I am back working from home.

I have closed my Barclays share dealing account and haven’t opened my spread betting account in months.

I have no real assets to talk of and it is nearly a year since I started this blog.

 

So, am I depressed?, am I carrying on?, am I still waking up each morning flinging the curtains wide and rejoicing at another day.

 

You bet! Life can seem hard at times, especially for a new business in the heart of a depression, with a government that increases tax on dividends by 1% every year.

However, the spring is here, the trees around my house are starting to bud and I am already thinking about the next plan to build assets and generate an income.

 

No one said it would be easy and many entrepreneurs have said they have had many failing businesses before they made it big. So I guess this is just another step along the journey.

 

I looked back over the posts i made here last year and I still believe in the same philosophy of  being free, building assets, focusing on the things that matter in life and working towards financial freedom through asset based revenue.

 

This is the end of one era and very much the beginning of the next one.