No one cares more than you do about your money. The professionals, be they your bank or insurance company, may make you some money but if they fail they are unlikely to suffer. If you want to protect your hard earned cash, you’ll have to get involved and take matters into your own hands. What you lack in expertise you can make up in motivation. The internet has made it possible to get the information that was previously only available to professionals. You can now check out companies simply by going to the financial sites and get all the information and advice you need to make a decision.
If you stick to Blue Chip companies your returns maybe lower than those from small companies but they’ll be safer and you’ll still participate in the ongoing economy. More product variety and wider market coverage as well as deeper pockets make companies safer and able to withstand unexpected events.
Additionally, large companies are covered by just about every finance house as well as the press and all other news media so you’re likely to get to know what’s going on in good time.
Having chosen the leaders in your preferred sectors, the key to good portfolio management is following your investments at regular periods. This doesn’t mean trading by buying and selling just because a share price has changed. Equally it doesn't mean putting your share certificates in a box and locking them in a cupboard.
You may well set limits on both the down and upside ready to discard continual laggards and also take profits at the top end. You should also keep at least 20% of your investment capital in cash so as to take up any unforeseen opportunities.
Listing your holdings by date and purchase price, you’ll be able to record prices regularly and follow performance in absolute and comparative terms. Using a basic spread sheet you’ll be able to compare individual performance on a weekly or monthly basis and take corrective action well before year end.
You should expect to make a return better than what you'd get from the best fixed year's interest to account for the extra risk. Set your target and take corrective action. You have to remain in control by comparing your companies to each other and to the index.
In your own field of work, you’re probably required to write a monthly report to your boss concerning performance on your objectives stating any deviations, as well as reasons and corrective action for the month to follow. This way you have a good chance of keeping things on track for the year end. Why not make a "report" to your self on your your investments as well?
You might invest in a sector where you have direct knowledge or one that is currently in vogue such as environment or energy and where you can read and inform yourself on the fundamentals. You may even want to invest in your own company. You can use the key data as a dashboard to drive performance just as when you’re running your own company.
Government changes, new tax and spending policies, interest rate changes, inflation, currencies, raw materials, energy, world events, all have an impact on stocks. A flood, a hurricane, an earthquake, affect not only insurance companies but also the resources required to put things back as well as the impact on consumers. There’s little that cannot be put to good use.
If you wish to benefit from growth in emerging markets then you have two possibilities. You either find a unit trust or mutual fund specialising in them, or you select a company that is trading in these markets and you ride piggy back. Much safer to rely on their expertise than try and do it yourself. Globalisation and technology has led to economic growth. A person in India or China, Brazil or Nigeria can now make products for world markets at a low entry cost. Our planet has shrunk thanks to air transport, communications with satellites etc., and business has grown. People that were previously excluded are now both consumers and wealth creators.
If you have little knowledge in a particular company you need to do your homework and check on their financial strength, the management, on the market potential, on past performance, on new products, on competition and their leadership position within the sector. There are also social and political factors that drive performance. Are your stocks socially acceptable in terms of impact on people or the environment? Is the company in a sector favoured by government?
Finally there’s technology. Just consider computers which in a period of only 40 years shrunk from the size of a room full of hardware down to a few chips. Then look at the exponential progress in telecoms, as well as the biotech industry. Mobile phones have revolutionised our lives. All this is very exciting but also risky. Make sure that you do not end up paying for this progress out of your own pocket, by buying at very high prices with respect to their potential earnings.
If in the end all this does not interest you and you want to hand your assets to financial advisors you still need to get involved and have a timely system of reporting to make sure that their priorities are your priorities. You still need to take part in the investment decisions where your own money is concerned.
Investing in Stocks Pt2
As an investor you should buy stocks for the long run but this
doesn’t mean that you put them away in a shoe box and forget about
them. You need to keep close to information about your stocks and be
ready to react. You ought to treat your investment as a business in
which you have to pay close attention, and adjust to the market.
In any worthwhile business you need to keep books that track your
performance on a weekly and monthly basis with milestones towards
your year end objectives. A spread sheet showing prices per week
compared to the index helps show the leaders and laggards. You also
need a short list of key indicators on a dashboard, that drive the
business forward. Review your successes/failures on a monthly basis
with corrective action to close up deviations on the way to year
end.
You may consider creating a virtual portfolio to start with choosing
and following your companies to get practice. A number of financial
sites provide this facility and give you all the advice necessary to
get you started. When you’re ready to go live, you can choose an
online broker. This will provide you with practically all the tools
needed to buy and track your stocks. Like a supermarket it will also
reduce your costs, benefitting from massive sales in getting lower
trading prices.
Look at the High Street itself - it may help you identify a good
stock. You may want to choose a company where either you or someone
close to you have first hand knowledge. You then start by making
gradual small purchases ramping up gently, giving you time to see
how the particular investment is performing.
You can use the Price/Earnings Ratio PER to compare different
stocks. If the price is high it could be that people are willing to
pay more for quality or future high growth. You can compare the P/E
ratio of a stock to its competitors. You can also use the inverse
namely the earnings / price as the yield of the stock to give you an
idea on how it compares with long term interest rates. With interest
rates at say 5% this would be equivalent to a P/E of 20 but you
might settle for a P/E of 17 as a middle value to allow for the
extra risk in stocks.
There are also mutual funds that cover sectors or the whole index
but these are somewhat blunt instruments. You cannot move quickly
concerning individual shares, you lack flexibility. Mutual funds are
good if you want to invest in other markets where you are unlikely
to have sufficient knowledge such as foreign stocks or raw
materials, gold etc.
If you want to spread your risk you may also consider trackers,
which combine the lower risk of mutual funds but are traded as
ordinary shares. They may cover a particular sector like pharma or
financials etc. You don’t have a fund manager and consequently you
do not pay an entry, exit or annual fee.
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