Wed | Mar 3, 2021

Oran Hall | Making informed personal investment decisions

Published:Sunday | January 31, 2021 | 8:52 AM

I have often wondered why some people are prepared to invest their money without even a basic understanding of what it really means to invest.

So often, investment advisers are blamed for not calling their clients to say when they should buy or sell. Sometimes investors, not knowing what they should do, take comfort in saying they will call their adviser to ask what to do.

I have often suggested that people not yet fully clear on how to invest should invest in unit trusts or mutual funds and benefit from the experience of the professionals and the pooling of funds.

Alternatively, they may opt to engage the services of portfolio management companies, which manage funds for a fee and which accommodate their clients with several arrangements such as accepting funds at regular intervals and not necessarily in large amounts.

What is required to a great extent is the willingness of investors to allow their funds to remain invested for a long time. This does not necessarily mean that funds will not be withdrawn because this may be necessary to fund particular goals.

But what if investors opt not to take any of these options? It seems to me that such investors should make some effort to educate themselves about investing: know about the instruments, how to evaluate them, and when and for what purpose to acquire them.

How do prospective investors, for example, approach making an investment in an initial public offering or an additional public offering? The prospectuses for these public offerings include a clause advising prospective investors to read the entire prospectus carefully before making an investment decision – with very good reason.

The prospectus includes a clause stating that it is not a recommendation by the issuer that the prospective shareholder should subscribe to or purchase the shares being issued. The prospectus generally states that prospective investors should make their own assessment of the company and the merits and risks of subscribing for or purchasing the shares.

Further, prospectuses also state that prospective investors should get professional advice before making a decision. Such advice may be sought from a stockbroker, for example. Of course, it may also be necessary to seek additional information to that included in the prospectus.

There are some matters that are quite straightforward: the dividend policy of the company, how the net proceeds from the issue will be used, plans to apply to the stock exchange for the listing of the shares, conditions for success of the invitation, and the products and services of the company.

Understanding the financial statements is less straightforward although the inclusion of financial ratios for several years and some discussion of the financials and other aspects of the company in the ‘Management Discussion & Analysis’ section are useful in giving some meaning and understanding to the many figures presented in the financial statements.

What the issuers of new securities are saying, then, is that investors should make informed decisions – by themselves or with guidance from qualified professionals.

This is not the only aspect of investing in equities for which this approach should be taken. In the general buying and selling of equities and other securities – investors must take responsibility for the decisions they make. To be able to make effective decisions, investors should have a basic level of knowledge of investment matters.

By knowing, investors put themselves in a position to have a productive relationship with the professionals they relate to. They are better able to evaluate the suitability of the recommendations the professionals make to them.

Prospective investors can also help the professionals to give them suitable advice by having a clear understanding of what they want to achieve and when.

As they get more experienced, investors may make their own decisions if they have the time required to keep up with developments in the market and in their personal and family situation. This does not mean being wedded to the news every day, particularly if investors are committed to maintaining their investments for the long term.

I am not saying only sophisticated people should be investors, but that it is incumbent on all investors to put themselves in a position to understand why they make the decisions they make and to free themselves from total reliance on the professionals.

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