Wed | Aug 23, 2017

Oran Hall | Stocks for the boys

Published:Sunday | June 4, 2017 | 6:54 AM

QUESTION: I write to seek advice on the ways in which I can maximise my small savings, no matter how minuscule, every month. I am a single mother of two boys, ages 11 and 8, fully aware that they are growing and their ability to go on to tertiary education is fully at the forefront of my mind. I have been having thoughts of purchasing stocks particularly AMG Packaging, JMMB, Sagicor and Blue Power Group. My research into these companies is just at the basic level just now.

What do you think of these picks? Would buying stocks be a good way to guard against inflation and be a good investment for myself and the boys, or what other investments/ saving instrument would you recommend, if any? — K Smith

 

FINANCIAL ADVISER: There are several things about your approach that I like. You save and you seem to do so regularly. You are prepared to start your investment programme small. You are taking the long-term view — regarding the education of your sons and investing. You recognise the value of making real returns, that is, returns which exceed inflation. You are doing research and are seeking advice.

If you continue to save and invest regularly, you will raise significantly your chances of realising the goals you have set for yourself and your sons. By making tertiary level education for them a priority, you are set to make a very significant investment, which education is. It can be a significant life changer for both you and them.

By beginning to plan for their tertiary education while they are still young, you are making it easier to succeed as time plays a very important role in the growing of financial assets. Even with the current low interest rate regime in our financial market, time can make a difference.

In fact, the low level of interest rates is one reason why stocks should do well. It makes it cheaper for businesses to borrow and thus make better profits, but it also encourages investors to move away from interest-earning instruments to those capable of generating capital growth. Stocks fit well into this category.

I am sorry but I am not able to advise you about specific investment instruments including stocks but I can tell you that stocks are good hedges against inflation. Their rate of return tends to exceed inflation over the long-term thereby giving a real return, thus protecting purchasing power.

This relationship between inflation and long-term returns on equities is an issue which has been studied extensively but, apart from the many studies, many investors who take the long-term view can confirm that they have realised this in their own experience.

Our own market does seem to discourage new investors as it tends to go through long periods of lack lustre performance. But it eventually wakes up and compensates for the long time it was in a coma. Sometimes, it even seems to over compensate.

This is one reason why buying regularly for the long-term can be beneficial. Doing so allows the investor to buy when prices are low even though some will come at high prices.

You have interest in four stocks — two of which are in the financial sector and are diversified but are in different segments of the sector. Of the other two, one is in manufacturing and one is in manufacturing and trading. Two of the companies are on the Main Market and the others on the Junior Market of the JSE. Perhaps these are companies you know about or have dealings with.  It is easier to maintain interest in stocks that mean something to you.

Notwithstanding the general acceptance of the long-term performance of stocks, bear in mind that individual stocks may not live up to expectations and that the price movement of even super stocks is not linear.

Of note is that you do show some appreciation of the need for diversification. You can take this to the point of investing in stocks in other markets later but you may also want to extend diversification to investing in other types of investment instruments.

Perhaps you may want to look at the wide range of unit trusts that dot the local investment landscape. It offers great scope for effective diversification with less pressure on your time plus more liquidity than you could ever get from stocks and room to build some element of safety of principal into your portfolio.

You should recognise by now that research does require time and I suggest that you make every effort to develop your research skills as they will come in very handy if you want to be a serious investor. And make sure that the funds you invest are not funds you may need for other commitments.

 

- Oran A. Hall, principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.

finviser.jm@gmail.com