Two words frequently encountered in economic reports these days are Inflation and Stagflation. What exactly do they mean?

Very often when we read reports and analysis, the US market is mentioned. The US market exerts no small amount of influence on other markets, especially those in Asia that depended on export to the US.

The danger of Inflation in US is highly anticipated. Inflation is the sustained increase in the average level of prices of a basket of goods and services. Do you see oil prices going up? How about transportation, groceries? Many believes that the consistently high oil price will trigger an inflation.

Some forecasted that we may even see stagflation in 2007. Stagflation = inflation + slowing economic growth. This was what happened during the 1970s, when world oil prices rose dramatically.

How does all these affect investing? Read on to find out.

Inflation and Stagflation affects Investment in a two ways.

First, as a result of raising prices, the same dollar is buying less and less things. In another word you will need more dollars to buy the same thing.

From an investment return prespective, the same investment with inflation considered would now have to return more in order to match the return without inflation.

Consider this, you are targeting to go on a holiday with your investment return at the end of year. Now inflation sets in and the holiday now cost 1.5 times as much. Correspondingly your investment would have to return 1.5 times as much in order to cover for the holiday.

Second, certain class of investments are affected more by inflation than others. When inflation is mention, interest rates are also mentioned in the same breath.

Often we heard of the US Fed adjusting the interest rate taking into consideration economic factors including inflation. (Note that this interest rate is not quite the interest rate you get from the bank. I might talk more about this in future.)

This gives you some clue as to the relationship of interest rate and inflation.

Now, what class of investment are affected by interest rates?

Fixed-income investment and bonds are most adversely affected. This is because while overall prices increases, the return remain a fixed precentage.

This is not an attempt to discredit fixed-income investment, they do have their place. More importantly it is to know your investment objective and the choosing the right investment class or portfolio.

Since I invest largely in unit trust (mutual funds), I like to point out that buying a bond fund in such scenario might help. The fund manager will hopefully manage a portfolio of bonds and use strategies to reduce the effect of inflation. (I not suggesting you go out and buy a bond fund now though.)

After reading this, you should have some insight into inflation, stagflation and their effect on investing. Like many things about investing, it is about understanding the underlying factors and investing accordingly.

This article is part of a regular column on investing by Ken of 59Ideas published on Invest Insight. You may copy and use this article if you retain this message.

In many books and papers, Fundamental analysis is often presented as an direct opponent of Technical analysis. Typically the introduction would focus on the drawback of one method and highlight why the favored method is better.

Do not be confused. It need not be this way.

Fundamental analysis can co-exisit prefectly with Technical analysis. I often use both of them in my investment analysis. Oftentime while looking at the chart, I would also look at how the fundamental factors like the economy and market looks like.

In order to use them however, you would need to understand how each of them is applicable and to use them to the fullest effect.

I did some introduction to Technical Analysis and now let me do the same with Fundamental Analysis.

First a basic understanding of Fundamental analysis.

Fundamental analysis is a method of investment evaluation that uses economic, financial and other qualitative and quantitative factors to understand and predict future performance.

Unlike Technical analysis which presupposed trend, and therefore aggregated investor activities, as predictor of future direction, Fundamental analysis presuppose economic and macroeconomic factors as predictor of future direction

Fundamental analysts study factors that can affect the investment, including macroeconomic factors (like the overall economy, industry and political conditions) and company specific factors (like the financial condition and management of the company).

Since there are many factors to look at when using fundamental analysis, there are many methodologies within fundamental analysis itself, each with their supportor and detractor.

Most unit trusts (funds) invest based on certain fundamental analysis methodology. You might have come across terms like value, growth when reading a fund’s prospectus.

These terms basically means that the fund manager select stocks for the fund based on a fundamental analysis method that picks out value and growth respective. Here I will not go into the detail since this is an introduction.

As mentioned before, investing is a continuous learning process. As I learn more, I will be distilling and sharing what I gather here with you.

This article is part of a regular column on unit trust investing by Ken of 59Ideas published on Invest Insight. You may copy and use this article if you retain this message.

What I am trying to get at here is that in order to be successful in investing, one not only need to invest money but also invest time as well.

Regardless of the form of investment – whether stocks, shares, bond, unit trust, options, futures, commodities and what have you, time is required to understand the basics and learn the details.

There is no shortcut to investing. So what happen when you have limited time?

My experience taught me 3 things.

• Educate yourself
• Get to know yourself
• Set aside time

Educate yourself

It is worthwhile to remember that education is the best investment and pays the best dividend.

So the first thing is to learn, as much as possible, as quickly as possible. But how do you know what to learn? There is such a vest body of knowledge, where do you start?

This lead us to the next point.

Get to know yourself

Your investing activities has to fit your personal profile. Do you work in the day? How much money do you have to invest? What is your objective? What is your risk profile?

Sounds very much like a financial analysis. Well it is. Knowing yourself is a basis for financial planning as well as the first step to investing.

Set aside time

This leads us back to the topic of Time. Taking into consideration your other commitments, how much time can you set aside?

It is easy in our daily busyness to steal time from the long term for our short term needs.

Investing is generally long term and the effect may not be immediate. If time is not set aside, it is likely that time could be “stolen away” for immediate gratification. Like from reading an investment book to watching a movie.

Take care of the time to invest and over time your investment will take care of you.

The next question is how can investors actually use these TA techniques?

The answer lie on the ability to identify 3 important features:

• Identify a trend
• Identify that the trend is continuing
• Identify the trend has reversed

When applying TA techniques, you are always on a lookout for one of these three features.

Identify a trend

The first step for an investor is to identify a trend from the current data. Upon identifying an up trend, down trend or sideway trend, the investor can respond accordingly from the arsenal of investing strategies that caters to that trend.

Identify that the trend is continuing

The ability to identify that a trend is continuing allows the investor to “ride the trend“.

Continue to apply the strategy that had been working so far. If it is up, go with it higher. If it is down, follow it lower.

Identify the trend has reversed

When TA indicators signal a reversal in trend, the investors should be ready to change strategy.

The ability to identify reversal is considered the most critical in the application of TA. All the hard work leading up to the reversal can be wipe out if the reversal is not acted upon decisively.

Conclusion

So while one may understand the theories behind technical analysis, the successful application and ability to identify trend, whether continuing or reversing, is the hallmark of a successful TA practitioner.

Typically a wide variety of charts and data are examined to see what the past movement or trend can tell us about the future movement and trend.

The word forecasting tells us that the it is not an absolute certainly but a close possibility .

This, if you must, is first take away of Technical Analysis (TA).

The effective use of technical analysis can help investors anticipate what is “most likely” to happen. The investor may still need to assess TA result objectively based on information outside the domain.

With the advance of technology, investment decisions are made quicker and in short period of time. Short term investors and traders find that TA yield more insights that techniques such as fundamental analysis in the short time span.

TA is often viewed as a collective representation of the crowd. Their behaviors, expectation and level of optimism or pessimism can be interpretated from the various turning points, peaks, troughts and trend on the charts.

Online References:

• Technical Analysis: Introduction
• Chart School – What is Technical Analysis?
• Technical analysis terms

Books:

• Technical Analysis Explained by Martin J. Pring

Starting with this introduction, my plan is to share my notes as I further my TA education.
Join me in this journey to be a better investor.