Advisory Column: Before you invest in stocks …
QUESTION: I want to know where to start. I want to invest in shares. I have an interest in certain firms, but I want to know how to make an investment. Is there any good investment you could recommend to me? – Jordon
FINANCIAL ADVISOR: Before you invest in shares, or ordinary stocks, it is important to know and understand certain things about yourself and the stock market, including the companies that trade on it.
Your goals are important. They help to determine the returns you should aim to derive from your investments and the time within which to make those returns.
If your time horizon is short, that is, if you are going to need your funds in the short-term, it is better to invest in a short-term instrument. Although stocks do not have a maturity date, the vagaries of the market are such that you may not be able to sell them when you need the funds, and stocks are generally acknowledged to be long-term investments.
On the matter of time, it is also important to have time to manage your investments. Although you are not likely to trade your investment instruments regularly, it is reasonable to expect you to monitor how they are doing and how the market is performing.
You should understand your tolerance for risk. High-risk investments tend to see greater price fluctuations than less risky investment instruments, and they tend to offer a greater chance of making very good returns but may also cause greater losses.
Your own psychological make-up is very important. It has some bearing on your risk tolerance. If you want to invest in stocks but do not believe you can handle the uncertainty and volatility of the market, it is best to have a fund manager manage your affairs or buy capital growth units in a unit trust, although neither of these approaches will completely remove your anxieties.
The younger you are, the better your chances of recovering from a loss and the stronger your financial position, the better is your ability to withstand losses. Investing in stocks is one of the more risky forms of investing.
As you pass through the life cycle, your approach to investing in stocks will vary. It is not necessary to eschew investing in stocks if you are more advanced in age, but you would want to invest a smaller portion of your resources in stocks and lean more towards more solid companies.
With this in mind, it is imprudent to invest funds that are for emergency purposes or for day-to-day expenses in stocks. For these purposes, you need more liquid instruments.
Determine if you are prepared to, have the time to, or are able to do the required research to equip you to make informed decisions. If you lack the required skills to evaluate the performance of companies, you should consider doing a course that can help you to do so or learn to do so on your own.
What of the market itself? I have already mentioned its volatility. It is often driven by the herd instinct. Market psychology has a strong bearing on the behaviour of investors. Many seasoned investors are able to make money by capitalising on the mistakes made by other investors who follow the herd - many of whom tend to lose heavily for their actions. Can you trust yourself to keep a level head?
At the end of the day, you will want to align your investments with your goals. Buying stocks could be out of alignment with your goals. In any event, they should not be the only instruments in your portfolio. You need a diversified portfolio.
To start, consider the issues I raised above. If you determine that you really want to proceed, educate yourself about the stock market and begin your research to identify the stocks that suit you best.
Consult a stockbroker for further guidance and open an account with one with whom you are comfortable doing business. The broker will assist you to open your account and to make selections that are suitable for you.
I do not give the type of specific advice that you are asking for, but there are competent investment professionals who can assist you. Whatever your final decision, I hope it works well for you.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org