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Feature Article>TRY: A New Mindset for New Investors Part 2By Lloyd A. Vermont Snr., Contributor |
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Some strategies to improve your chances of success as a New Investor
"The strongest principle of growth lies in human choice." - George Eliot pseud. of Mary Ann Evans, 1819–80, English novelist
This essay is the 2nd part of “A New Mindset For New Investors”. It focuses on some of the strategies, which, if implemented, will endow to your success. In stock market investing, there are no guarantees. So, how come so many investors become wealthy? The strategies that they employ in their investment pogramme will provide much of the answer. One of the most fundamental of these strategies is the amount of time to which an investment is exposed. In operational terms, this means starting your investing activities from your first pay cheque after you have been confirmed in your first job.
The only people who are likely to be this informed and disciplined, however, are those from environments (home or extended family) where the subject, and benefits of investing, was a standard part of the family discussion. Most of us, therefore, would have missed the opportunity of starting to invest from our 1st job. No need to shoot ourselves, though, because, we still have two other opportunities to minimize the impact. One is to start as soon afterwards as possible (late 20’s and early 30’s preferably) so that the wealth building capacity of time (as measured in decades) can kick in and perform its compounding miracle. The other ‘catch up’ time is at the birth of each of your children. As illustrated in How to make your (grand) child a multi-millionaire by age 25, every child has to pass through two and a half decades to get to age 25 and (while there are no guarantees in stock market investing) with good stock selection, the probability is very good that every such child will indeed become a multi-millionaire by that age.
OTHER SPECIFIC STRATEGIES
In addition to starting early, there are many other wealth building strategies
that you should use to increase the chances for success in your investing.
As a new investor, you will need the advice and counseling of a trusted
stockbroker or financial adviser. However, as I keep emphasizing, you
have an obligation to yourself to build up your knowledge base as quickly
as possible about investing in general and the strategies that will enhance
your success in particular. Among the most important of these are:
1. Buy what you use, know and understand
2. Start with what the trade calls a Money Market or Index Fund.
3. Buy dividend paying individual stocks
4. Buy well recommended young growth stocks
5. Employ dollar cost averaging to make your purchases
6. Beware of over diversification
Peter Lynch, the legendary manager of the Fidelity Magellan Fund (www.fidelity.com) popularized the notion of buying what you know. Peter is of the view that you and I have the facility to find outstanding stocks many times before the professional stock pickers know them because, we are among the first to see and use the products and services that these companies provide. Put another way, if your children, your neighbour’s children, and children in most of the homes you visit are clamouring for a product (iPod for example) this is probably a clue that children and young people everywhere are clamouring for the same product and that, if so, whoever makes it, is likely to become a successful company (if it is not one already). Ofcourse this ubiquity by itself may not make a company particularly successful but it is among the possible indicators.
Start with a Money Market or Index Fund.
All investors, and particularly new ones, have to contend with a concept that the trade calls your risk profile. This speaks to your ability to deal with risk. Risk is defined as the measurable possibility of losing or not gaining value in your investing programme. The ability to deal with this risk is important precisely because there are no guarantees in stock market investing. This means you will have to manage it to prevent it from negating your investment result. Managing it comes with trade offs. Generally speaking, investments that come with guarantees, such as when you lend your money to your government (the trade calls this fixed income investing) typically have the lowest rates of returns. If you don’t like the possibility of losing any of the principal that you invest, you will have to settle for these low returns. This categorizes you as an investor with a low risk profile.
On the other hand, there are some investments, such as buying stocks and real estate, where there is no guarantee whatever that you will make back any or all the money you invested but which, as you likely already know from experience, may double, triple or even more your initial investment if and when you sell. If you are this kind of person, the trade categorizes you as one with a high risk profile; you wont run home to mommy and cry if you lose 25% of your investment because, as a long term investor (which is what you should be) you know that business runs in cycles and that, if you can wait it out, you could more than make up for today’s 25% paper loss.
I give you this background so that you will better appreciate the choice of investment vehicles from which to choose in your first foray as an investor. If you tend towards the low risk profile, you might wish to start investing in an instrument that comes with three important advantages. Typically these instruments are what the trade calls Money Market and Mutual or Index Funds. Money market means your investment is in essentially interest driven investments which are usually guaranteed, and also that it will be relatively easy to exchange your investment back to cash. Typically, these guaranteed instruments are loans to government or blue chip companies. Apart from the commercial banks, the following companies offer Money Market Funds (MMFs) in Jamaica Barita Investments Ltd www.barita.com ; DB&G Ltd www.mydbg.com ; Capital & Credit Merchant Bank www.capital-credit.com ; Pan Caribbean Financial Services http://www.gopancaribbean.com and GraceKennedy’s Caribbean Fixed Income Fund www.gkfund.com