The Yin-Yang of Your Money

If
your crystal ball about money is dim and cannot shed light to the future, then
chop it in half and balance them like the Yin-Yang. Let your gut feeling weigh
which side should be bigger. But never put all your weight on one side.

If you could have a crystal ball about the
economy and which direction the money is heading, you'd probably be on Wall
Street making a big impression. Fair enough - nobody has that crystal ball. All
economists and mutual fund managers can say is "On one hand this, on other hand
that." But nobody can predict which will be the upper hand.

1.
Need a Head Bigger Than the Skull

In reality, the number of factors
influencing the economy exceeds the simple, magic number of 2.

Change
of Consumers: Population change such as baby
boomers directly impacts supply-demand.

Change
of Technology: New inventions (e.g., Internet) may
open new markets and create different life styles.

Change
of oil (gas) price: Oil is the blood of economy,
need I say more?

Change
of world affairs: Global economy, chain reactions.
Chinese has a saying "pull one hair and the whole body feels it."

Change
of Environment: Watch out the Mother Nature's
unpredictable temper, e.g., Katrina.

Change
of Interest Rate: Guess who is the most powerful
party in the US? Bush or Greenspan?

Change
of Psychology: Living within ones means used to be
basic human dignity. Now many live beyond their means in a big house.

There are gazillions of other factors
impacting the economy and your money. The weight of each factor is difficult to
assess. Even though science and technology have advanced to the state of
predicting the weather, no computer can predict the economy yet (at least not
publicly). Mankind as a whole needs
a head bigger than the skull to predict its own behavior.

2.
Simplify to Your Gut Feeling

The Chinese ancestors invented a
simplification mechanism called Yin-Yang, or Female-Male, or Moon-Sun. The
late Chinese Chairman Mao had a famous saying: "Divide 1 into 2". The English
version of the same philosophy is "on one hand… on the other hand…" I guess all
such thinking mechanisms originated from the simple fact that we each have two
brains (left and right hemispheres), two hands, two feet, two parents….

Now let's group the major economical
factors into two sides: Deflation and Inflation – the Yin and Yang of money.

On the Yin
side, if consumers spend less, or if technologies fail to create new
markets/demand, or oil price decreases, or wars in the world discourage
people/companies to travel and spend/expand, or…. then we'll likely have deflation. Things will be cheaper and
interest rates will drop. In this scenario, housing bubble may pop and economic
depression may prevail. If you believe this will be the future, you'd better hold
on to your cash, put it in CDs, bonds, or other fixed income; because your
money will be worth more later.

On the Yang
side, if consumers spend more, or if new technologies successfully create new
markets/demand, or oil price increases, or the world peace encourages
people/companies to travel and spend/expand, or…. then we'll likely have inflation. Things will be more
expensive and interest rate will go up. In this scenario, you'd better buy
gold, or real estate, or anything that will not decrease value as the money
paper would. If you believe this will be the future, you may want to get a big
loan now; because the money you pay back later will be worth less (now think
who has the biggest debt in the world?)

3.
The Art is in the Balance

It's up to your gut feeling which side you
want to put more money on. You don't get that gut feeling by digesting
hamburgers alone, you need to read and study economic history, news, and world
affairs. But no matter how your gut feels, never
put all your money on one side. Reasons:

a) The reality may not always agree with your gut feeling.

b) Yin and Yang interact with each other and inter-flow with time.
E.g., gas price goes up, inflation heads up; then people travel less and spend
less, demand will decrease, inflation will calm down, and deflation may head
up. Economy has its own self-adjusting mechanism similar to your body
temperature. A fever of any type cannot
last long, otherwise the whole system dies.

c) There are fundamental mathematical reasons why diversification can decrease
risk. This should be a separate topic next time.