Oran Hall | Cashing in on the stock market
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: How can I benefit from the new gains in the stock market?
FINANCIAL ADVISER: If you have not yet benefited from the gains in this run of the stock market, you have missed quite a lot. That is not to say that you cannot reap any benefits if you choose to invest now.
You should not expect to see the kinds of gains experienced in the last three years or so. The market had been in a quiet mode for a long time, some times more than others. When it rebounded, therefore, many stocks had significant scope for upward movement – and they did move.
Considering where the prices of most stocks are today, even big price movements may see only moderate movement in percentage terms even if the market continues in this vein for a while.
Always bear in mind that investing in stocks is primarily a long-term activity although there are times when significant gains can be realised in a short time. Bear in mind also that there can be significant fluctuations in the short term.
You would likely have noticed that there has been a steady increase in new listings. Expect more. Companies tend to come to the market when activity is robust and investors are confident about its current and future performance. Add to that the efforts of the stock exchange to entice more companies to list.
New listings tend to be priced to allow price appreciation. In many cases, too, listing is followed by meaningful improvement in the financial performance of the companies. This presents opportunities for gains.
But even companies which have been listed for a long time on the Jamaica Stock Exchange have potential to give you good returns as can be seen from the consistent increases in their profits. Some are expanding into new markets. Others are introducing new products and services and some are radically changing how they operate in order to be better able to serve the market and respond to competition.
Lower lending rates and the raising of equity capital – for the newer listings – are making it cheaper to do business, thereby enhancing their ability to make better profits. Add the steady improvement in the macroeconomic environment, evidence of which we have been seeing in recent years.
Risk exposure and rewards
Considering the level of nominal prices of most equities, the dividend yields at current prices are generally low, but they are not necessarily worse than the returns on fixed income securities. On the other hand, investors who bought shares in the glory days of low nominal stock prices are enjoying very good – phenomenal in some cases – dividend returns.
If you are not comfortable with investing in individual securities, you can opt to invest in any of the unit trusts that invest in equities. This will save you time but, very importantly, create scope for you to reduce your risk exposure by investing in a diversified portfolio.
It is possible that you are now benefiting from the gains in the market – indirectly. For instance, you could have an equity-linked life insurance policy. To the extent that the segregated fund supporting it invests in common stocks, you are benefiting from the performance of the stock market.
In fact, you are likely reaping rewards similar to those being enjoyed by individuals who have invested in unit trusts that participate in the market.
If you are contributing to a registered superannuation fund or a retirement scheme, you are almost certainly enjoying the fruits of the rich stock market harvest as many of them do invest in the stock market – perhaps conservatively, but they still invest in the market directly or through the professional managers charged with investing their funds. Do you know that the National Insurance Fund, the investment arm of the National Insurance Scheme, invests in equities?
When you do have the experience of reaping benefits from the stock market, be careful to handle your new wealth responsibility. By your new wealth, I am not necessarily suggesting you will become a millionaire. It is up to you how you use it.
If you determine why you are investing, it makes it so much easier to determine how you use the gains from participating in the market. If your purpose is to build up resources for retirement, stick to it and let your fund grow, expecting that sometimes the market will decline and adversely affect your portfolio.
Perhaps your goal may be more short term, like buying a house. Do so when you have realised your target. There are many other goals you may be able to realise. Keep to your plan and be disciplined in how you manage your programme.
Oran A. Hall, the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.