Here are some easy to understand investment tips that may help you put together an investment strategy. These tips or guidelines are by no means the only factors you should consider when making investment decisions, but they may help you avoid costly mistakes.
Do not put everything you own or even most of what you own into any one investment.
This excludes the family home which technically is not an investment. You will of course kick yourself when company XYZ goes up 300% overnight and you were going to invest everything you own in that company, however this pain is far less than losing everything because you put all your eggs into one basket and that basket falls off a rather high cliff. I know this sounds like a pretty basic rule, but it is amazing how many people end up putting most of their savings into a single investment scheme that ends up falling apart.
Write down all the bad things about any investment before you invest.
If you cannot think of any bad aspects about an investment you are contemplating of investing in then get some advice, because all investments have risks and potential problems. After you complete the list ask yourself if the expected return you may get is worth the risk, or do you feel more comfortable with having you money in the bank until something else comes along?
Make sure you understand the Product Disclosure Statement (PDS) or documentation related to the investment.
Product Disclosure Statement’s are not the easiest documents in the world to understand. I often wonder if the people writing them are paid by the word as they seem to be able to produce dozens of pages of documentation without actually making things clear to the average investor. Take you time reading any investment related material (try and stay awake) and Google any terms you are unsure of. If you still have trouble getting a good understanding of what is in the PDS then either skip the investment or seek good professional advice.
Do you own research!
The internet is a great place to do research. In particular you can check the ASIC website and search for company information or financial scams. You can also use a site like Investopedia to read up on investment and financial terms. In addition most online brokers these days also provide varying levels of company research and analysts reports. There are also useful links on the: shareswatch.com.au website and these can provide you with information ranging form commodities prices to latest business news headlines.
Also try to read widely and obtain a few different sources of information. Many investment related websites do not necessarily offer independent analysis even though they may claim they do, so look around. If a particular website or advisor is pushing an investment product or asset class strongly then ask yourself why are they doing this? Do they stand to gain from commissions etc? Are they selling a related product or trying to steer you into a paid newsletter subscription? Is the product or investment they are suggesting really suitable for your risk profile and investment objectives etc?
Have a disaster plan!
In a perfect world we would make a series of investments and then sit back and watch them grow into a lovely sum that would fund our retirement or allow us to buy that boat we always wanted. However we need to be prepared for trouble and think about what we will do if there is a stock market crash or some of our investments fail. For example ask yourself these questions:
- At what point would I try and cash in my investments if their value began to fall?
- At what point would I sell my stocks in a particular company during a stock market rout?
- What sort of losses can I manage?
- What will happen I get a margin call? Do I have cash ready for that situation?
- Can I handle a few years of negative returns?
The key point about having a disaster plan (and you can just do it in your head) is that it makes you think of the risks involved when investing. I suggest you regularly review your disaster plan as you might find it a lot easier to do this when you have time, rather than trying to sort things out in a panic when that margin call arrives.
Look after your health.
Being healthy is far more important than trying to be the next Warren Buffett. If you find yourself unable to sleep at night because you are worried about stock prices then I would suggest you look at putting your money in the bank. Managing investments is not for everyone, and for many people it is probably better for them to seek assistance from a good financial or investment professional rather than try to do everything for themselves.
Get expert or professional advice.
Even if you are an expert investor you will at times be out of your depth and may need some advice to help you make a decision. This advice can be obtained sometimes by reading a variety of analysts reports, by contacting your broker or by speaking to your financial adviser. As a starting point have a look at the Financial Planning Association of Australia website: http://www.fpa.asn.au
Expect to have losses and bad days.
It would be just lovely if none of our stocks or investments ever declined in value. However no investment is 100% safe and as the saying goes, the higher the expected return – the higher the risk. So mentally prepare yourself for having the odd failure. If the thought of having an investment failing makes you nervous then that is probably a good thing and you will avoid putting too much money into any one investment type. It is better to miss some gain and preserve your money, than to lose everything.
Try and keep a good sense of humour.
Try and keep your sense of humour during both your moments of investment triumph and during the times when falling asset values and stock prices are causing you grief. Remember if you have followed my tips above you should not have put all you money in any one investment, and so hopefully not all your investments will be down at the same time. As that song goes in the Life of Brian…try to “always look on the bright side of life”. If you find yourself yelling at the dog and pulling the arms off your teddy bear, then perhaps active investing is not for you.
Finally here are some thoughts I put together in early 2008 about the various sources of stock market related advice and information that might be of use to some readers.
A quick note on the good, bad and ugly sources of stock market advice.
There appears to be an ever increasing number of stock market related websites and no shortage of stock tips and market advice available to us all. But who should we listen to, and where are some good sources of stock market insights?
As readers of my blog and editorials will know, I have mentioned on numerous occasions that my own comments regarding the stock market should be treated as just my own personal observations and that I have no ability to predict the future. I do not consider myself an expert in any form but I do invest and manage investments for a living. (and at the moment I am still eating regularly)
But there are many people on the web and in the media who do put themselves forward as “experts” and so perhaps the following points will help you determine the good, the bad and the ugly sources of stock market advice.
1. Watch out for the self titled “experts”. Ask yourself does the “expert” actually earn their main income from investing or rather writing about investing? If it is the latter then I would question how much of an “expert” they really are.
2. Be wary of the experts and market commentators that just make vague statements that leave room for them to be right no matter what direction the market moves in.
3. Beware of the technical chartists especially those who offer to show you how to make money if you attend one of their courses or buy their software. You can learn plenty about technical charting from free sources on the Internet. (such as www.investopedia.com or from many of the links provided on this site) Remember technical charting is not a guaranteed road to riches and has many limitations.
4. Beware of the people who tell you they have picked most of the past corrections. Depending on your definition of a “correction” there could be 1 or 2 every year so if I say there might be a correction in the next 12 months the chances are I will be right. Some so called experts are always predicting a correction so I guess eventually they will always be right by default.
5. Listen to company CEO’s, CFO’s etc. They might be a little generous with the way they talk about their own organisation’s performance but they are the people at the coal face so to speak. Also you can get a good feel for how businesses may fare in the short to medium term by reading company announcements or watching interviews their CEO’s etc do. (on T.V or via the web on a site such as Bloomberg)
6. Brokers and analysts are not evil. They often maligned by financial journalists and others but the fact is they often put in the hard yards and produce some very good research and company outlooks. Of course do not use their research as your only source of information but disregard 50% of the criticism directed at brokers and analysts by journalists as jealously. (I am not a broker or analyst by the way)
7. Pay attention to what fund managers are saying and what stocks large investments fund own or are buying/selling. You can see for example what stocks Listed Investment Companies (LIC’s) hold by reading their company announcements and portfolio updates. (available from the ASX website) I am not saying you should follow the fund managers, but at least you may be able to get a feel for what sectors people are moving into or out of.
8. Tread carefully when dealing with stock market chat rooms, online bulletin boards, red hot stock tips you heard from the taxi driver on the way to the airport and that mysterious e-mail that landed in your inbox telling you of an incredible stock buying opportunity. Personally I tend to treat all these sources of information as unreliable, although I do accept stock suggestions from little green aliens 🙂
This article was written by Greg Atkinson who is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp