About the Talk
July 18, 2010 12:00 PM
Taipei, TaiwanTaipei, Taiwan
A friend recently said that she got an old laptop from her son in order to go into stock investing. So, she is not only beginning to learn how to use a laptop, as well as a tablet, but also how to invest in stocks. At way past, 65 years, it is never too late.
Investing in stocks overtakes other instruments, such as treasury bills, cash or gold in the long run. Within a short period, however, other assets may outperform stocks, but, in general, stocks have outperformed other instruments hands down.
How do you invest in stocks? There are several ways: individual stocks, index funds, mutual funds, ETFs, domestic, foreign. Which should one choose? Here, as a beginner-investor, you will gain insight into how you can make your money grow through stock investing. But before we start, kindly answer this first question.
Ask this important question
Which are you: a risk-taker, risk-hater or in between? Do you grab at any chance to make a big gain or do you take time to make a sure profit? Is a 10% drop in a single stock in a day or a 30% drop over a couple of weeks enough reason to unload in a hurry?
Answering this vital question might determine whether you enjoy taking risks or would rather avoid it. If the latter applies, you might have a better time dealing with mutual funds or index funds since they are well diversified and contain many different stocks which have reduced risks and require no research into an individual stock.
Do you have the time and aptitude to invest?
Depending on how much time you have, you may choose between investing in funds or stocks.
The choice depends on the time you want to spend on this endeavor. Proper selection of mutual or index funds will allow you to invest money and letting the fund manager do the difficult job of selecting stocks for you. Even simpler are index funds since they vary depending on the class of industry, firm or market they are meant to monitor.
Investing in individual stocks, on the other hand, consumes a lot of your time since it involves making evaluations about management, incomes and potential growth. You now endeavor, as an investor, to make a distinction between revenue-making stocks and financial failure. Educate yourself about what they can do financially, how they can create wealth for you, the potential risks, and prospects for your future and many others.
Hence, determine your comfortable extent of involvement in terms of time for this venture. Will you devote two or more hours a week evaluating various firms, or are you already too busy to put in the time? Like any other skill, investing in individual stocks requires ample time to nurture.
A single basket of eggs
Preferably, do not limit yourself to just one asset. As an example, do not invest only in small biotech firms. Although the prospects of gaining can be bright, certain actions -- particularly by the Food and Drug Administration rejecting many applications for new drugs – can affect your investments; if not totally wipe them out.
Diversifying over a wide choice of various sectors, for instance, real estate (a real estate investment trust is a good prospect), insurance, consumer goods, commodities, etc., instead of only a few of these candidates will favor your potential success. Think of choosing several asset types along with putting some money in cash and bonds, as opposed to investing fully in stocks. Decide how you want to spread your investment across these sectors and classes as long as you do it as broadly as possible to minimize losing everything all at once.
A Beginner’s Portfolio
As a beginner, consider investing a big bulk of your money in two or more index funds, those which track the broad market (such as the S&P 500) and another one which provides some global exposure. Also add one that tracks small companies (such as the Russell 2000) to boost your portfolio.
Such a portfolio consisting of those three would provide sufficient variety, the more stable performance of big firms and the dynamic qualities of both global companies and small caps.
A Portfolio with Individual Stocks
Individual stocks can offer plenty of diversification if you build a portfolio of 12 to 20 good choices, just the right number you can comfortably monitor on a regular basis. Nevertheless, make sure you completely decipher every company concerned, from its operations to its various risk sources. If you intend to engage only in stocks, spread your money over various sectors, for instance, technology, health care, big as well as small cap.
If time is a big concern for you or have no intention of choosing so many stocks to monitor, think of selecting a combination of individual stocks and index funds. In addition, particularly if you begin with minimal funds, investing in 12 to 20 stocks may be undoable. Thus, investing a big share of your money in funds would offer more stable returns often generated by such funds. Augmenting maybe five or six individual stocks more could spice up your portfolio.
Time to Invest
Once you have determined the contents of your portfolio, it is time to invest. Find a broker you are comfortable with, whether online or through a local office or both. Call and talk with this person, if necessary. Then do the necessary documents, deposit some money and open an account.
Once you have decided which to invest in, enter slowly that is, do not buy everything at one time. The danger lies in the dire possibility of a market downturn and you invest all your money at once. Such a turn of events could be disastrous for you, financially and psychologically. Spread all your investment funds over several months to reduce any diverse market risks. Finally, remember to set aside time each week to review or catch up on the news for your investments.
As time goes on and you gain confidence through experience, your asset distribution habits will certainly improve. You can then amend your portfolio regularly, yearly or so, by disposing of some stocks in one class of investment and investing more in another class. Eventually, you can shift your portfolio by adding more funds to those sectors where you desire more exposure.
These increased funds can be utilized to increase the number of stocks you hold or can be augmented to your present holdings. Once you practice this regularly, you could have a sizeable portfolio that can support your retirement well, finance a new dream house or satisfy other needs you may have which led you to invest in the first place.
The Bottom Line
The first step in deciding to invest in the stock market is to consider what you wish to achieve and how to attain your goals while remaining within the limits of your risk capability. Evaluate the amount of time you can send in investing. Does this even before you let go of a single dollar and you will never have to falter along the way through moments of indecisiveness. Possessing prudence and knowledge before and after you begin your investing career will go a long way than merely chasing the latest hot stock. Remember, your money matters to you and you have a say as to what you want to get out of it and why.