Financial Adviser | New to the stock market
Published:Friday | August 12, 2016 | 12:00 AMOran Hall
QUESTION: I have been interested in the stock market for some time now but only just recently found myself in the financial position to actively take part in it.
I have put all the necessary documents in place and will open an account at a brokerage house in the coming week but I do not know which stocks to buy, I have an idea, but no solid information to act on.
I am going with a two pronged approach in terms of investment strategy. I will pursue simultaneously long-term (10-15 years) and short term (2-5 years) investments. For the long-term I will invest in bonds and real estate holdings. So far I have only identified Sagicor for investment in real estate because of their recent acquisition of stakes in a hotel property on the north coast and in 138 Student Living. For short term investments I will be focusing on the junior market adjusting my approach and being aggressive when appropriate.
I do not have much solid information and I would like to get your advice on my strategies. — Jesse
FINANCIAL ADVISER: You have already taken some important steps in preparing to invest in stocks: you have waited until you have the financial resources to do so, you have selected a stock broker, you have determined a strategy and you have selected some stocks to buy.
A stock broker is in a far better position to advise and guide you than I am. There is very limited space in this column to offer what you need, but a stock broker has time and resources to assess your situation and to draw on in-house and external research to guide you. One of the reasons that brokers charge a commission is that they provide a range of services to their clients.
Don’t be shy to engage the broker to guide you. At the same time, it is important that you know what you want and that you have an understanding of what is happening in the market and the economy.
It is clear that you appreciate that the stock market is able to allow investors to put their funds into areas they would not normally be able to invest in if they wanted to do so directly. Thus, you are looking at real estate as well as tourism.
Although you no doubt recognise that investing in stocks is long term, you have indicated that you intend to use the Junior Market for your short term investments and seem to suggest you will trade actively in that market.
It seems to me that such an approach is not the best particularly for one who is short on experience. Additionally, trading takes time and it costs so your gains could be easily eroded.
It is not a bad idea to add bonds to your portfolio. They add stability and income to the portfolio but expose you to purchasing power risk as inflation erodes the value of the interest earned over time.
You will need to invest time in research if you seriously want to participate in the market. Identify the sectors of the economy that are doing well or are poised to do so. The Statistical Institute of Jamaica, the Planning Institute of Jamaica and the Bank of Jamaica publish useful data on the economy. The media and some financial institutions also provide useful data and commentary.
Identify the top-performing listed companies in the sectors you are impressed with. The listed companies release final and interim financial statements. They also provide historical financial information in easy-to-follow formats so it is usually relatively easy to observe trends and to make comparisons with other companies. To be better able to understand the financial statements and make sounder decisions, I suggest you learn how to analyse financial statements if you are not able to do so. It is up to you if you enrol in a course or if you teach yourself.
Although past performance is no guarantee of future performance, it is nonetheless a very good guide particularly for companies that have a strong brand, have a strong position in their industry, are managed well and produce goods and services that are not easily substituted.
Bear in mind that the market does affect the prices of stocks as it goes through the cycle of prices rising and falling regardless of their quality. Trying to time when to buy and sell can be quite frustrating and remember you are only a human and do not have supernatural powers. If you are able to, invest systematically; you will, in this way, buy some stocks at low prices but others at relatively high prices.
Emotions still play an important part in investor behaviour so there will be times when you may not be able to understand why prices rise and fall as they do. Your best approach is to use the tools available to you to make reasonable decisions based on the value of the stocks rather than following the herd.
There is no need to hurry to make good returns from stocks. Time is the master, so be patient.
- Oran A. Hall, principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.