WHEN is the best time for one to start an investment portfolio? A misconception we have often encountered is that people think that the best time to start an investment portfolio is when one has a large lump sum.
As we discussed last week, investing is the same as saving, except that your options are widened and the risk-return profile expanded.
Therefore, if you can save, then you can invest and by investing as opposed to saving, you greatly enhance returns from your money, as compared to putting it into a traditional savings account.
Investment is something best done over time, just like saving. You do not wait until you have a large lump sum before opening a savings account; you do it when you have more cash than you require for your day-to-day needs.
For the smaller investor, the best way to start is by opening a money market and stock broking account with a reputable stockbroker.
Stockbrokers are the agents through whom you make your share purchases, but they also often offer a money market service in addition, and will get you better rates than if you approach a commercial or merchant bank’s treasury division directly.
The bigger investors, though, can do their money market investments directly with the larger institutions’ treasury departments.
Having opened your account, you then go through the asset allocation and stock-picking exercises we discussed in our article two weeks ago (the article is available on our website,ttp://www.adway.co.zw, and you’ve become an investor!
Thereafter, all you need to do is occasionally restructure your portfolio in line with changing market fundamentals and to add or subtract funds from the portfolio.
There are two basic investment scenarios we use, which are dependent on the investor’s circumstances. An investor saving to buy a house 10 years from now, saving towards a pension plan or just looking to stash away excess funds can weight their portfolio more strongly (or even totally) in favour of stocks, as over a long time horizon, most stocks will almost undoubtedly outperform any money market investment.
It is important though, to ensure that the portfolio is adequately diversified to minimise risk over the investment horizon, and that it has the right stock mix in order to maximise returns.
Like we have said, you can start with even a small amount (sample portfolio on our website is based on just $1 million), and add onto this continuously, thereby growing the portfolio both from additional capital injections, and from dividends and capital appreciation.
The effects over time can be phenomenal (a static portfolio we ran from January 1 2002 to date has grown 32 897% ie from $1 009 250 on January 1 2002 to a value of $333 019 000 as of February 18, compared to inflation over the same period of 5 445%).
For this investor, we recommend buying equities and holding onto these to avoid the temptation to continuously buy and sell (account churning) as this only results in high transaction costs and seldom gives high returns.
Only sell when there is a definite problem with the counter in question.
The returns mentioned above should be convincing enough in terms of the importance of holding.
Additional funds being invested can then be used to buy into undervalued stocks over time. By using funds which are excess to your current requirements, you are also not pressurised to sell into a bear market; the stock market can experience protracted periods of falling prices, and this is the worst period in which to sell stocks.
An investor close to retirement, retired or on a retrenchment package would need to structure their portfolio with a more significant weighting towards money market assets.
The money market assets are there to cater for the investor’s month-to-month requirements, particularly over periods of falling stock prices while stocks are included to realise returns in excess of inflation, and thus ensure that there will be funds going forward which can be liquidated to fund monthly expenses.
Investors living off their investment portfolio should follow a highly-disciplined investment management style particularly if they do not have other sources of income to fall back on.
Set yourself a monthly salary and maintain at least six months’ “salary” in money market assets before investing in stocks. Stick to your set salary, just like you would if you were in regular employment. Many such investors have been derailed by continuous “emergencies” which have resulted in premature depletion of their investment portfolios.
Our recommendations are generally tailored towards this type of investor as they have the more complex portfolio, compared to the long-term investor.
We strongly advise against approaching investment as a speculative activity, though (eg buying shares for a couple of months using the money your uncle sent from the UK for you to buy him a house, before buying the house) as speculators are generally inexperienced and are bound to make the punter’s mistake of buying into an overheated market.
As we have said many times before, investment is best done over a long time and such speculative stints can have negative repercussions on your finances and on your relationships!
So if you have been putting off starting your own investment portfolio, remember that there is no time like the present and take action to empower your financial future now.
You can get more detailed information on our website. Happy investing! — Own Correspondent.