The dos and don'ts of investing

QUESTION: I really am a small investor and have just started. I'm into stocks. I would love if you could give me the basics on the dos and the don'ts.

- Dwayne

PFA: I will be positive and focus on some of the things you should do. It should not be difficult to see what you should avoid from the advice.

My first piece of advice - start now - does not apply to you. You have started. The earlier you begin the better. You have more time to recover from losses and there is more time for compounding to work. Charles B. Carlson would agree with you too. He said, "Time is an investor's biggest ally."

You have started with equities. You are saying by this that you are interested in growth or capital appreciation. Over the long-term, stocks generally outperform all other forms of investment. It seems you are on your way.

It is important that you know why you are investing - that you have a goal. It gives an anchor to your investment programme. Your goal determines your strategy, and helps you develop the discipline to invest regularly over the long-term.

Invest regularly. Money that is not in the market cannot generate returns from the market. You may spend money not invested on things that cannot add to your wealth. You see, the urge for instant gratification tends to be so very strong. Resist it. Build up your investments. Every little bit adds up. Be satisfied with the small returns. They will add up.

TAKE LONG-TERM VIEW

If you know why you are investing and take a long-term view, you will see no need to trade aggressively.

Each transaction costs. By buying and selling too regularly, you reduce your chances to reap the long-term returns from investing and increase your transaction costs. Only your broker is happy when that happens. Markets rise and fall so avoid panicking when the falls come. They often provide good buying opportunities.

Manage risk - keep your portfolio out of harm's way.

Diversify by asset type; resist the temptation to invest in only one type of instrument such as stocks. Diversify within each asset class. In your particular case, invest in several industries, in more than one market, and more than one currency as your portfolio gets bigger.

Define reasonable performance benchmarks, that is, manage your expectations — be realistic.

Use your own money to buy securities. You should not feel pressured to sell because you are straining under the pressure of servicing a loan. For one thing, you must have some cash flow to make your scheduled payments if you borrow.

DON'T GET SENTIMENTAL

Fall in love with human beings, not with investment vehicles. If you must liquidate an investment because it no longer fits into your programme or is not performing to expectations, or has given you the level returns you expected of it, move on. Keep sentiment out of your investment programme. Take losses without a frown; some investments will go wrong.

Take what your government gives you. If you can defer tax, do so. Avoid tax with your investment programme if you can. I did not say evade tax. That is illegal. Tax avoidance is not, so make use of legitimate means to ease your tax burden. Stocks provide such a way as capital gains are not taxed. Neither are dividends.

It is not likely you will be master of all types of investment and even though you have chosen to focus on equities, you will find it easier to relate to some types of companies than others. Stick to what you are comfortable with and what you understand. Become knowledgeable about what you have decided to focus on.

You will find it difficult to keep informed about your investments if you over diversify and may not reap any real benefits for doing so. Build a portfolio that is manageable and do your own research so you can make informed decisions.

Do programmed appraisals of your portfolio. You will want to make sure that it is meeting your expectations. Your own personal and financial circumstances may change. There may also be far-reaching changes in the economy and in the financial markets. Government may introduce new laws that may affect you and your investments.

Having started, keep focused on your goals and remember you are investing for yourself. Let others focus on their own programme. What they do should not influence your decisions. If you need help, find a competent investment professional.

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