Investment guide for beginners

Oran A. Hall, Contributor

QUESTION: I would like to develop a stable financial future. What are some things you can recommend to a novice who is interested in investing to turn around my finances?

- Denise

PFA: Sensible investing is critical to a stable financial future and it is commendable that you are interested in taking the right steps to do so. Your success will depend on your willingness to do what is most suitable for you and to treat your investments as a long-term programme.

You must begin with a budget which will help you manage the income you earn so effectively so that you will be able to save.

Your chances of building an investment portfolio are dim if you do not save. Certainly, you would not want to be borrowing to invest so early in your investment programmme. You would want to ensure that you have funds to meet your short-term needs, including your recurring living expenses, before you commit seriously to a plan.

Before going any further, seek to know who you are; understand how you feel about money.

This is critical to how you make decisions relating to money and how you respond to them. It is critical to how you invest, and your approach to investing determines how well you will do. If, for example, you are primarily driven by fear, it is very likely that you will take a conservative approach to investing.

Whereas this approach yields safe, reliable returns, you can be certain that they will be relatively low. This could have implications for your ability to make the amount of money you require to meet your goals.

But what if you love money, really love it - to the level of greed? Can you make the money you want to? Yes, you can, but you could lose, and lose badly with that attitude. Know your attitude to risk, your ability, and willingness to take it.

Establish why you want to invest. Do you want to purchase a house, or provide tertiary education for yourself or a family member, or to have a good-quality retirement, for example? Determine when you want to achieve your goals, noting which is short term, medium term, or long term. Determine how much you need to save to achieve them.

Asset allocation, how you distribute your money among the different asset classes - short term or money-market securities, long term interest-bearing securities, common stock, income-earning real estate — is the most important determinant of the performance of your portfolio. How you distribute your money within these asset classes, that is, selection of securities, is also important, but to a lesser degree.

If your main objective is growth, it will be reflected in your asset allocation, also called the asset mix, because your portfolio will be weighted more heavily in investment vehicles such as common stock and real estate than in bonds and money-market securities. If your primary objective is income or the preservation of principal, the portfolio will be weighted more heavily in the latter securities.

Diversify. It is an effective way to manage risk but avoid investing in too many securities. It does not necessarily improve the quality of your portfolio but requires more of your time.

Portfolio manager

Determine if you have the required time to manage the portfolio. If you don't, you may invest primarily in unit trusts or mutual funds. Alternatively, pay a portfolio manager to do so.

Be careful, though. Ask how the portfolio manager is remunerated. If it is on a performance basis and it is based on the commission generated by your account, you risk an unscrupulous fund manager sacrificing the performance of your portfolio by increasing your costs through overtrading.

You risk doing the same thing if you overtrade if you opt to manage the account yourself. Hence, it is important to keep a long-term perspective. This will temper the temptation to react to almost every movement of the market.

It makes little sense to be investing if you do not know anything about financial markets and instruments.

You do not have to be an expert, but you must have some knowledge of such matters. Read financial papers and magazines. Attend seminars. Use available Internet resources. There is no shortage of financial and investment information. The problem is there is so much it may confuse you if you are not careful.

Avoid getting sentimental about any investment. Sell if it looks like a loser, or when it gives you the return you want from it. Be patient and do periodic evaluations to ensure it is meeting your objectives.

Start small if you must and keep some liquid funds to take advantage of new opportunities. Don't risk what you cannot afford to lose nor invest funds required for regular living expenses. You do not need the stress.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com