Investor Tips by Mercantile Investing Africa You are here: Home » Investor Tips Investor Tips Are you new to investing? Do you want to know the “How” and “When” to invest? If so, you’re in the right place. Most likely you already know how to invest. Most of us, if not all, have invested at some point in our lives. When you went to school, you invested your time to get something in return, education. We do a lot of investing in our everyday lives. When you buy a car, not a traditional investment, but still you get something out of it, it just doesn’t have a lot of residual value left after it’s paid off. A house is a great investment, over time, property values rise which makes for an excellent investment. To invest, you need RULES and most importantly DISCIPLINE. You also need to understand the basics of investing. Would you like to buy that dream home at full market value? or say 5, 10, 15 million-Shillings above the real value of the house in a normal market. I doubt that even if you were filthy rich you would actually do that. We buy, or should buy, on discounts. All else equal, most of us will buy the cheapest thing. We all seek to achieve the buy low, sell high dictum. If you can plan and manage a plan, keep your cool, you will be a confident investor Trading or Investing. The words ‘trading’ and ‘investing’ are mostly interchangeable in definition. Trading, is normally recognized as the act of performing buy/ sells frequently- TRADES. Investing, on the other hand, is however recognized as a more long-term approach and is not necessarily frequent. For the retail investor just starting out with little or no knowledge of buying and selling stocks in the stock market. Before you go and buy that stock or fund, you need to get your financial affairs in order. Make a Plan. You need a CEO or a CFO to sit down, make a plan, assign tasks and be responsible for actions in your plan and you are going to be the CEO and you can also take on the duties of CFO or delegate that to your spouse. As the CEO, you need to set up some rules, make a plan and hire a CFO to setup a budget- and most importantly, setup a reserve fund. Very important is having a budget, to know and control how much comes in, and how much goes out. One product of a budget is knowing how much you have to invest. Also you need a reserve, a cash fund– maybe a money market– cash that can get you through an emergency if one develops. As an investor, the last thing you’ll want to do is have to sell an investment before its time. All budgets need reserves. How much is something you need to decide, but it probably should hold enough for several months. Now that you are considering a budget, reserve fund, setting up a plan and managing it, let’s now turn to shares of ownership of a company– stock in a company– and mutual funds. Cash, stocks, and funds. Let’s turn our attention to cash, stocks, and funds. Bonds and other investment strategies- ETF’s, short sell, Forex, etc., will not be covered in our investment tips. Before discussing cash, stocks, and funds, let’s identify an account where you can execute a transaction to buy or sell in the stock market. Open a Brokerage Account. First and foremost you will need to set up a brokerage account. A stockbroker is a CMA licensed firm like NIC Securities that will assist you to conduct buys and sells and to manage the account using money that you sent them or transferred to them. After choosing a brokerage, you would then apply to the firm, going through the KYC process and they will then open a CDSC account which will be where your stocks are held. Application normally consists of your name, address, phone/cell number, PIN Number, type of account and other setup information. Account funding instruction would also be a part of the setup process. “A brokerage is a business licensed by Government to act and conduct business as a Broker between buyers and sellers in the capital/ stock market” To fund an account, you send money [or transfer the money] to the brokerage. The brokerage in turn holds the cash in the core account as “cash to settle with”. The cash sits in the cash portion of the account and is used by the brokerage to settle orders you execute. Stocks/ funds that you buy are debited out of the cash in the account. Stocks/ funds you sell are credited to the cash account. Commissions and interest are debited to cash while dividends are sent to you either by post or are credited directly to your bank account. And, of course, you can withdraw available cash. Stocks and funds. Basically a stock is a share of an individual company, or a piece of a company, that they give for a price. A stock or share of a company can be bought, held, and sold on the open market or in a private placement. When you buy stock, you are issued, electronically or physically, a certificate of ownership that identifies the company you invested in, number of shares & registration number. A fund (mutual fund/unit trust) is normally made up of individual investors that pool their funds which a fund manager invests in a collection of investments of different companies or sectors. Money from investors is collected into the funds cash account. Shares are then bought and sold under management of the fund manager, Individual investors hold units which reflect the value of thefunds underlying investments and which they can sell when they want out. Ideally if you don’t want to manage your investment, you can buy shares of a fund/trust and let a ‘fund manager’ manage it for you. In which case you should seek a fund manager that is right for you. One of the things you need to do is decide if you want to manage or do you want to hire someone else. If you want to have someone else manage your investment then you can go the mutual fund/unit trust route or have a Certified Financial Planner manage the investment. 1) Hire a CEO. That’s you. To control your investments like a business. 2) Hire a CFO. You again or your spouse. Develop and maintain the budget. Build a cash reserve or emergency fund. 3) Open a brokerage account/ buy direct from companies. 4) Decide how to invest. You do the buying and selling. Buy a fund and let the fund manager manage. A combination of the two. Or, hire a Certified Financial Planner. Buying, selling, making money. This is the easy part… 1-2-3… you buy it, watch it grow, sell it and make tons of money… Buying is fairly easy, concentrate on companies that you understand and avoid those that confuse you. Remember if you are uncomfortable with buying stocks, buy a good fund in the sector you are interested in, i.e.., healthcare, energy, retail, etc. And also remember to diversify. Do not put all of your money in one stock, or sector. Watching your investment grow is painful sometimes. Well, most of the time. We’ll get into how to handle this later. Selling is the real difficult part of it all. When is a good time to sell a stock? When it’s up and you have made a lot of money? or down when you can’t bare it any longer. Selling is always the tough one to answer. Which leads us to goal setting. Goal setting. What is a goal. A goal, basically, is something you desire or want to accomplish- an objective. Investment goal is setting an objective that is reasonable, able to be met, within a time frame. First, start by defining objectives for this goal. It could be a college fund for the kids, retirement for you. There may be a house that you would like within the next five-years. Whatever the reason you have identified as your goal for investing, you then need to figure out how much you have to invest. You may have multiple goals. I.e. short term College, and long term retirement. From your budget how much can you contribute each month or quarter. “you have to have a budget or you’ll be flying blind. You wouldn’t get on a commercial airliner with a blind pilot. So make a budget, it’s that important” This is where a strategy comes in. Build a plan, a strategy of the different goals you want to meet and a timeline of when you want these goals to be reached. Determine how this will fit in with your budget. Once you have that, you can determine what kind of risk there is for each of the goals. Example. If you are in your mid-thirties and you want to retire when you are 60, then you have about 25 years for this goal. So that kind of risk is low if you have 20 to 30 years for your investment goal to be reached. You could possibly afford a very risky fund or volatile stocks that both may go from one extreme to the other but you may not care as you don’t or will not need the goal reached for such a long period of time. Example. Let’s say you want to buy a house in less than 5 years. You may also have equity in the current house that can also be used. Here since you have less than 5 years to meet your goal, you probably would approach this with very low risk. The stock market goes through cycles, as does the economy, housing, and energy. These cycles can take years to evolve, so with less than a 5 year timeframe, it would possibly be too risky to invest in stocks or funds. The last thing you want to happen is for that 10,000 shilling investment to turn into 6,000 shillings because the market is down and you can’t wait for the market to comeback. Example. Let say your vacation- life time vacation in Europe is coming up next year. You certainly don’t want to have any risk with this, so a money market, tax exempt may be what you would use to fill this goal. These three examples are intended to give some extremes so that what you have learned can be retained by example, especially if you can relate to these fairly common goals. Now that you have a goal, you may be ready to find an investment. If you are going to buy your own stock, you’ll need to find a company to invest in. There are 56 of companies listed on the NSE for you to consider. Do the homework in choosing a company to buy. If you are concerned about choosing the right company, look at funds. Or look at what funds have in their portfolio. If you cannot make the time to research these companies on your own, then talk to your stockbroker. NIC Securities offer such advice for free maybe you would be better off with a fund and a fund manager that can manage the risk on a daily basis. The big question is, when to buy and more importantly when is it the right time to sell. Do you sell when you make a profit, or when the stock sinks and you’re losing a lot? Remember goals? That’s why you are investing. The “when” can be anytime based on the goal. -long term- -short term- Find a company or fund that you want to invest in. How? Again NIC Securities provide you with all the information that you need. Company sites and market news sites have tools that you can use as well. mystockskenya, mystocks.co.ke, rich.co.ke, CNBC, abndigital. bloomberg, af.reuters. e.t.c. The Internet is a great place to find information. Once you have found the company or fund to invest in, determine how much money for that goal you want to invest. As a rule of thumb, you might invest a portion of the money. That is, If you have Kes 10,000 for the goal, take a portion of it, let’s say Kes 2,000, and make an initial buy. When? Why not today. There is no best time or worst time to invest, not in the conventional sense. You have to determine that for yourself. If you like buying discounted, maybe the best time is the worst time… Timing the market. When is a good time, when is a bad, when is the safest time? The safest way to play stocks and funds is to invest in the fundamentals. Fundamentals of a company, ref are hr to, how the company is performing i.e profits and margins. What they are selling services/product, the demand, cash flows, return on assets, management and performance over time, shares and business performance. Forecasting the market You cannot predict the stock market 100 percent of the time, unless you say it’s going up, sideways, and down, then, of course, you’ll be right… You can attempt to forecast the market with less than 100 percent accuracy but you’ll find market predictions to be very difficult even experts cannot foresee all events. Externalities in the form of wars, skirmishes, storms, natural disasters, and elections can play havoc with the stock market. Just look at what happened to stocks during the credit crisis when banks went under. So a forecast can only forecast the fundamentals of a market, sector, stock, fund. So what to do. Unless you can stay in front of the PC all day and not miss a thing, you’ll find it difficult, at best, to try and trade the market. Trading, by our definition, is buying and selling multiple times in a short-term pattern. The idea is to make profits quickly. Investing, by our definition, is buying and selling over longer periods of time. The idea is to make profits over the long term. The “buy and hold” process. Of course you must find the right company or fund. Once you have, then you might buy an initial stake. Let’s look at the process with the following examples. In these examples commissions and interest have been left out. Let’s say you have done your research and you have found the right company, this example also works for funds. Let’s say you found a company named ABC. You have looked over the stock or the prospects, if its a fund, and you have determined that you want to buy it. Let’s say you have 10,000 shillings for this stock or fund (a goal). Let’s say you buy Kes2,000 worth of the stock that is selling for Kes20 per share. You just bought 100 shares. You have spent Kes2,000, have Kes8,000 left in cash for this goal, and you have 100 shares of ABC. Lets say over time the stock goes down to Kes16 a share. You decide to buy another Kes2,000 worth of ABC. Why? Because if this is a good solid company or a fund, and in your review you have no reason to suspect anything other than it’s a great stock or fund, you could better your position by buying more. A good way to make money is to cost-average as the stock goes down in price, you can better your cost basis by buying more shares as the price gets cheaper. When you turn around a year later, or when you have reached your goal, you stand a better chance of making more money by cost-averaging. OK, lets back up a little. What happens when you buy the initial position in ABC and ABC goes up in price. You can leave it alone, let it go up, put your money on another goal or… You can still dollar cost average even while the stock or fund is going up. All you are doing is moving your cost basis up. The point to all this is to find what works for you. Make a buy/ sell plan. You don’t have to make big bucks overnight. Take the long-term approach, with a plan. There are plenty of good reputable websites on the internet, like the ones mentioned above, that have in-depth lessons and articles that you can study. Whatever you do, take the following with you: Be patient. Don’t worry over the ups and downs of the market. Make an investment strategy (plan) and follow it. Diversify, diversify, diversify… Warren Buffett who is a renowned investor didn’t get rich by emotional investing. He made a plan and he followed it. Tips for stock investing To invest in the stock market, there are some essentials which you should bear in mind. Understanding and predicting stock market trends is not enough to form sound investment strategies. For one it is not of major importance that one makes a huge return on initial investments – as long as you do not lose money, you can consider it a successful trade. Continually chasing huge profits can and often results in considerable losses. Taking smaller risks is normally a more prudent way of investing especially for beginners. Taking interest in the companies that one invests in is another important factor in defining success of investment in a stock. After all you are a part owner of the business. Understand what their long-term goals are and also the ownership and management structures. It also helps to have an idea what the company does. This will give you a better understanding of how your investment is being used, and can be beneficial in helping you to make future decisions regarding the stocks which you own. Lastly, patience can also be key. Although some stock investments might offer a quick profit, there are a great many that won’t. However, it is often easier to predict long-term changes in the market, and so being prepared to hold out for long-term period of time can often greater rewards for those who have invested Stock market turbulence In October 2011 press statements stated that the NSE was the worst performing stock market globally? Between October 2011 and April 2012 the NSE was the best performing market globally. Bad market performance can thus be an opportunity for an investor to buy great, growing, profitable companies at very cheap prices. There are so many great investments out on the market to be made, in the stock market and in real estate; you just need to see opportunities for what they really are! The biggest risk in investing is not taking enough risk, you do not want to kick yourself in 10 years and think: “I could have bough XYZ at 5 shillings a share”. Recession proof stocks Although all stock prices will fluctuate over time (cyclicality), some business models tend to handle downturns in the economy better than others. Utilities like KPLC, who sells necessary household items that will be bought no matter what, should not be too negatively affected by the economy and are thus considered defensive in nature An ISP like Access Kenya on the other hand is more sensitive to the economy. People might use less internet if they are low on funds and hence the stock will tend to be more cyclical in nature. It follows therefore that defensive stocks normally perform better than the market in rough economic periods and worse than the market when things are going well. Here are my top 3 recession proof stocks: KPLC Nation Media Kengen Inflation and Investment Inflation is the erosion of purchasing power. When inflation increases income and earnings that a company makes should increase in tandem. Since everything is based in currency value and everything is going up, theoretically the price of a share of stock should rise as well, but it does not always work out that way. Certain companies react differently to inflation, and rightfully so, every company is different. With inflation comes the rise in interest rates from the Central Bank of Kenya to try to temper inflation, this can cause a negative effect on the economy and the financial sector as well. As a norm personal wages tend to lag the rate of inflation when inflation is abnormally high, so you do not want to own companies that are very sensitive to consumer spending in periods of high inflation. Particularly those that deal in non essential consumer goods. When inflation is high it usually foretells a tough economic environment. In tough economic environments you want to be invested in solid, dividend paying, bread and butter companies. BAT, EABL, Carbacid and Barclays Bank of Kenya are great examples, there are plenty of other examples as well. situation but you must have a game plan to capitalize on any economic situation. How inflation works Let’s say the market takes a 30% dive over the next year. Every time you check your stocks or stock mutual funds, you’re going to feel the pain. Likewise, if interest rates rise, your bonds won’t let you forget it. Nowhere on your bank or brokerage statement, however, are you likely to get a report on what inflation is doing to the real value of your holdings. If your money is stowed in a “safe” investment, like a low-yielding savings or money market account, you’ll never see how inflation is gobbling up virtually all of your return. Here are some points to bear in mind: - At an average annual growth rate of 9.8% a year, stocks will double your money in a little over seven years. Factor in inflation, which has historically run at about 9% annually, and it will take more than 30 years to double your actual buying power. - Likewise, bonds, growing at roughly 5.4% annually, will double your money every 12 years. After inflation, however, it will take 56 years. - If your money is in cash, you’ll have to wait 23 years for the nominal value of your account to double, assuming the cash earns the historical 3% annual return. But even your grandchildren won’t see the real value of your money double. That’s why, whenever you add up your gains or losses for a given period of time, you have to add in the effects of inflation to understand how much further ahead or behind you really are. Stock types, Portfolios And Diversification It’s good to clarify how securities are different from each other, but it’s even more important to understand how their different characteristics can work together to accomplish an objective. General stock classifications Defensive Stocks This classification includes two of the sectors that fall in the sector division. They are as follows: 1. Utilities 2. Consumer staples These sectors are less susceptible to market cycles since no matter what the market conditions are people will not stop consuming food or electricity. Stocks from these sectors are used as a balancing and protection mechanism by many investors in their portfolios in case the markets shift downward. However, the advantage of defensive stocks can be their drawback as well. This is so, since no matter what the conditions of the market are people will probably not start to consume more energy or food, so when the market is up, the prices of defensive stocks may not go up as well. As a result it is the perceived stability of defensive stocks that provide a safety net for investor portfolios. Some general characteristics of Defensive stocks include but are not limited to: 1. Strong market share 2. Large market capitalization 3. Belong to the Blue chip category 4. Tend to have low volatility 5. Tend to have low retention ratio/high dividend yield 6. Have stable and predictable earnings 7. Tend to be mature companies 8. Tend to have high market price (usually a share split can reverse this tendency) Growth Stocks As mentioned above, growth stocks are growing in price and show their potential for further future growth. In order to classify a particular stock as a growth one, you should look for the following signs: 1. Growth stocks show sound growth rate Growth stocks should provide a stable record of past growth. Additionally, they should show potential for projected growth going forward. NICS assigns different rates for companies based on their size. For small companies we look for around 10% or more growth rate for the previous five years and search for approximately the same percentage for projected growth. On the other hand, big companies should show a record of 5% to 7% growth rate for the past five years and almost the same percentage for projected growth. However, we keep in mind that over the long term big companies tend to grow more slowly than smaller ones. 2. Growth stocks show sound Return on Equity (ROE) NICS research provides reliable comparison between the stocks and their industry or sector peers and competitors over a five-year time period. 3. Growth stocks show sound Earnings per Share (EPS) When evaluating growth stocks NICS pay attention to its pre-tax profit margin. Ensuring that he latter is more than the five-year industry or sector average. Our research team constantly checks whether these companies have the potential to consistently transfers sales to earnings. We conduct further checks on whether the management team controls the costs that are incurred. 4. Growth stocks will have higher retention rates and lower dividend yields Since they are expanding, growth stocks will record higher capital gains since the market will value them based on perceived opportunities. We also keep tabs on current events since it is our opinion that if a defensive stock announces requirement for additional funds or a bonus issue it could indicate that the company has identified a new growth sector. When classifying stocks the NICS research team conducts constant evaluation to determine whether they meet these criteria. The research team further applies superior valuation models and earnings projections in order to make more reliable judgment. We always keep in mind that a particular stock may not show all of these signs but still be a growth stock. Additionally, we apply financial models to check the projected price of the stocks. Most analysis of a particular stock price is made on the basis of the business model and market position of the company that issues the stock. Carefully considering whether the stock has the potential for price appreciation over a five-year time period. Cyclical Stocks Stocks from the cyclical classification tend to be sensitive to underlying economic and market conditions, especially to its cycles, as their name implies. The good news is that if one sector is down, another sector may experience an upward trend. Examples of company stocks that are likely to be classified in the cyclical domain are as follows: 1. Energy 2. Technology 3. Communications 4. Transportation 5. Basic materials 6. Financial As it can be seen from the list above, investors will not find any difficulty in recognizing whether a particular business belongs to one cyclical sector or another. However the decision regarding when the stock can be considered to be at a growth or defensive stage can be daunting. As one can easily discern from the above. It is therefore a task that NICS through its experienced research and business development teams constantly undertakes to ensure that investors stay in touch with economic and market dynamics that could potentially inform their investment preferences at any point in time. It is for this reason that personalized risk profiling and portfolio structuring form the basis of NICS investor relationship standards as a means to ensuring that our clients attain the ideal risk return potential from their investments. The Portfolio A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor’s goal(s). Items that are considered a part of your portfolio can include any asset you own – from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, we will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents. An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent a type of vehicle to which you have allocated a certain portion of your whole investment. The asset mix you choose according to your aims and strategy will determine the risk and expected return of your portfolio. Basic Types of Portfolios Aggressive investment strategies – those that shoot for the highest possible return – are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance (can stomach wide fluctuations in value) and a longer time horizon. Aggressive portfolios generally have a higher investment in equities. The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments. To demonstrate the types of allocations that are suitable for these strategies, we’ll look at samples of both a conservative and a moderately aggressive portfolio. Note that the terms cash and the money market refer to any short-term, fixed-income investment. Money in a savings account and a certificate of deposit (CD), which pays a bit higher interest, are examples. The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. The portfolio you see here would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities. A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents. You can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large companies, small companies and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited. Why Portfolios? It all centers around diversification. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio. There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it’s really just the simple practice of “not putting all your eggs in one basket.” If you spread your investments across various types of assets and markets, you’ll reduce the risk of catastrophic financial losses. Knowing Yourself: Risk Profile Investors can learn a lot from the famous Greek maxim inscribed on the Temple of Apollo’s Oracle at Delphi: “Know Thyself”. In the context of investing, the wise words of the oracle emphasize that success depends on ensuring that your investment strategy fits your personal characteristics. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. Although there are many factors that determine which path is optimal for an investor, we’ll look at two main categories: investment objectives and investing personality. Investment Objectives Generally speaking, investors have a few factors to consider when looking for the right place to park their money. Safety of capital, current income and capital appreciation are factors that should influence an investment decision and will depend on a person’s age, stage/position in life and personal circumstances. A 75-year-old widow living off of her retirement portfolio is far more interested in preserving the value of investments than a 30-year-old business executive would be. Because the widow needs income from her investments to survive, she cannot risk losing her investment. The young executive, on the other hand, has time on his or her side. As investment income isn’t currently paying the bills, the executive can afford to be more aggressive in his or her investing strategies. An investor’s financial position will also affect his or her objectives. A multi-millionaire is obviously going to have much different goals than a newly married couple just starting out. For example, the millionaire, in an effort to increase his profit for the year, might have no problem putting down Kes100,000 in a speculative real estate investment. To him, a hundred grand is a small percentage of his overall worth. Meanwhile, the couple is concentrating on saving up for a down payment on a house and can’t afford to risk losing their money in a speculative venture. Regardless of the potential returns of a risky investment, speculation is just not appropriate for the young couple. As a general rule, the shorter your time horizon, the more conservative you should be. For instance, if you are investing primarily for retirement and you are still in your 20s, you still have plenty of time to make up for any losses you might incur along the way. At the same time, if you start when you are young, you don’t have to put huge chunks of your paycheck away every month because you have the power of compounding on your side. On the other hand, if you are about to retire, it is very important that you either safeguard or increase the money you have accumulated. Because you will soon be accessing your investments, you don’t want to expose all of your money to volatility – you don’t want to risk losing your investment money in a market slump right before you need to start accessing your assets. Personality What’s your style? Do you love fast cars, extreme sports and the thrill of a risk? Or do you prefer reading in your hammock while enjoying the calmness, stability and safety of your backyard? Peter Lynch, one of the greatest investors of all time, has said that the “key organ for investing is the stomach, not the brain”. In other words, you need to know how much volatility you can stand to see in your investments. Figuring this out for yourself is far from an exact science take the NIC Securities risk profile test for a clue; but there is some truth to an old investing maxim: you’ve taken on too much risk when you can’t sleep at night because you are worrying about your investments. Another personality trait that will determine your investing path is your desire to research investments. Some people love nothing more than digging into financial statements and crunching numbers. To others, the terms balance sheet, income statement and stock analysis sound as exciting as watching paint dry. Others just might not have the time to plow through prospectuses and financial statements. Putting It All Together: Your Risk Tolerance By now it is probably clear to you that the main thing determining what works best for an investor is his or her capacity to take on risk. We’ve mentioned some core factors that determine risk tolerance, but remember that every individual’s situation is different and that what we’ve mentioned is far from a comprehensive list of the ways in which investors differ from one another. The important point of this section is that an investment is not the same to all people. Always remember this to avoid following others into the deep end. If you are not sure about how you would react to market movements, we can suggest one good starting point: try starting up a mock portfolio in the free investing simulator by registering on the link below simulator.investopedia/#axzz1sYuXLFFJ , which gives you Kes100,000 of virtual money in an account that tracks the real stock market. The simulated experience of investing can really help you know your head, your habits and your stomach before you invest even one real dollar. More Interesting Investing tips. 1. Over the long term, stocks have historically outperformed all other investments. Stocks have historically provided the highest returns of any asset class 2. Over the short term, stocks can be hazardous to your financial health. During the credit crunch crisis, the NSE lost 40% in shareholder value. More recently, the shocks have been prolonged and painful and in 2011, stocks overall lost 26%. 3. Risky investments generally pay more than safe ones (except when they fail). Investors demand a higher rate of return for taking greater risks. That’s one reason that stocks, which are perceived as riskier than bonds, tend to return more. It also explains why long-term bonds pay more than short-term bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment’s value. 4. The biggest single determiner of stock prices is earnings. Over the short term, stock prices fluctuate based on everything from interest rates to investor sentiment to the weather. But over the long term, what matters are earnings. 5. A bad year for bonds looks like a day at the beach for stocks. In 2010, the worst year for bonds in recent history, intermediate-term Treasury securities fell below 5%, and in 2011 they bounced back 18%+. By comparison, in the 2009 bear, the NSE20 Index fell 44%. It is still to recover to date. 6. Rising interest rates are bad for bonds. When interest rates go up, bond prices fall. Why? Because bond buyers won’t pay as much for an existing bond with a fixed interest rate of, say, 5% because they know that the fixed interest on a new bond will pay more because rates in general have gone up. Conversely, when interest rates fall, bond prices go up in lockstep fashion. And the effect is strongest on bonds with the longest term, or time, to maturity. That is, long-term bonds get hit harder than short-term bonds when rates climb, and gain the most when rates fall. 7. Inflation may be the biggest threat to your long-term investments. While a stock market crash can knock the stuffing out of your stock investments, so far — knock wood — the market has always bounced back and eventually gone on to new heights. However, inflation, rarely gives back what it takes away. That’s why it’s important to put your retirement investments where they’ll earn the highest long-term returns. 8. U.S. Treasury bonds are as close to a sure thing as an investor can get. The conventional wisdom is that the government is unlikely ever to default on its bonds – partly because the economy has historically been fairly strong and partly because the government can always print more money to pay them off if need be. As a result, the interest rate of Treasurys is considered a risk-free rate, and the yield of every other kind of fixed-income investment is higher in proportion to how much riskier that investment is perceived to be. Of course, your return on Treasurys will suffer if interest rates rise, just like all other kinds of bonds. 9. A diversified portfolio is less risky than a portfolio that is concentrated in one or a few investments. Diversifying — that is, spreading your money among a number of different types of investments — lessens your risk because even if some of your holdings go down, others may go up (or at least not go down as much). On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin for exactly the same reason. 10. Index mutual funds often outperform actively managed funds. In an index fund, the manager sets up his portfolio to mirror a market index — such as NSE20-stock index — rather than actively picking which stocks to purchase. It is surprising, but true, that index funds often beat the majority of competitors among actively managed funds. One reason: Few actively managed funds can consistently outperform the market by enough to cover the cost of their generally higher expenses. Sources include investopedia and CNN money
Posted on: Wed, 10 Jul 2013 07:21:06 +0000