Financial Adviser | The right trading and investment strategy
FINANCIAL ADVISER: If you continue to seek to know more about investing, you should be able in good time to see yourself as having more than limited knowledge of investments. You are in a good place.
By its very nature, investing is a process and is long-term in nature. The buy-and-hold approach is a better option than the trading approach. Depending on market conditions, significant profits can be made by trading, that is, buying and selling regularly. This approach requires regular monitoring of the market to find new opportunities and to make decisions regarding when to buy and sell.
But it can be fraught with many challenges. This approach puts much emphasis on market timing. With the best will in the world, you will not always get it right. Selling too early can be costly. Considering too that each transaction has a cost, regular trading can cut significantly into your profits.
On the other hand, taking a long-term approach can reap significant gains for investors in equities and other investments that yield capital gains. Sure enough there will be periods of decline in the markets but these may be seen as opportunities to invest at lower cost thus reducing the average cost of particular elements of the portfolio. Even long periods of decline eventually end so it may take time to realise very good returns.
Taking a long-term posture does not mean that there should be no liquidation of positions. It does make sense to make changes if a particular investment is not working out and does not seem to have good prospects for the future.
Additionally, sometimes it is prudent to remove some instruments from your portfolio due to them not being a good fit for the portfolio. It is also reasonable to expect that the time will come when the reason for making the investment has come thus triggering a decision to sell, but it is prudent to limit trading to limit the cost of managing the portfolio.
Bear in mind that bond prices also fluctuate but primarily in response to changes in interest rates. Losses are only realised when bonds are sold - and below their purchase price. Except in cases in which bonds are bought at a premium, that is, above 100% of face value, no capital loss will be realised at maturity.
Selling bonds when the prices increase does generally result in capital gains being realised, but it is worth noting that any re-investment of the proceeds in other bond issues may result in lower current income due to the fact that bond prices rise when interest rates fall.
The investment vehicle you select is a function of your goals, objectives, risk tolerance and time horizon. Add to those your understanding of the available instruments. Beyond that, you should aim to create a diversified portfolio. The factors I mentioned at the beginning of this paragraph should guide how you distribute your money among the instruments.
A qualified and competent investment professional should be able to assist you to determine an appropriate mix and to select suitable instruments. To begin the process of investing, consult a licensed securities dealer; you may choose a stock broking company, a wealth management company or a portfolio management company.
The minimum sum required to start an investment portfolio varies. It depends on the investment instrument and the investment house, but some unit trusts tend to have a low required initial investment as well as a low required sum for subsequent investments. A sum of $5,000 should be able to get you started with some unit trusts.
This column does not generally recommend specific investment instruments, but there are capable professionals at the various investment houses who would be more than happy to assist you. I suggest you speak to persons at more than one of these companies but do not speak to so many that you end up being confused as I can guarantee that they will not all make the same recommendations.
- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.