As regular readers will know, we have started to think of investing in order to build sufficient money so we can sit back – or lie back – enjoy ourselves and do some good. Maybe it is a bit late in the day but since we haven’t cracked time travel yet, we have to start from where we are. Regret is a useless past-time and an irrelevant excuse. Younger folk please take notice and action.
Accordingly we have started to discuss various investment types and opportunities on our sibling blog The Investment Principle and also ihave been reviewing innovatiove investment platforms. More importantly, after paying off all our consumer debt in three years we have built a small but rapidly growing investment pot; the pot would have been even bigger if some of it was not being spent on a new roof as the noise from above reminds me.
Having a new roof is a sort of investment as it improves the security and integrity of the house as well as augmenting its future value. But we will also be installing 4 kW/h capacity of solar panels – about as much as is realistically practicable. These are a real investment because, adding together the feed in tariff, the saving in consumption and selling surplus electricity back to the grid, they should yield something above 13% per year completely passively. Some estimates go as far as 20% but I think their calculations are optimistic sales talk.
But it all makes us feel righteous anyway! Is there a price on that?
Where else will we look for investment? I discuss elsewhere the perils of property – although watch that space. But having expressed an interest in various online resources, I am now frequently bombarded with emails and telephone calls suggesting X, Y or Z are really good opportunities – I cringe when I hear that word.
Do I really want to invest in things that come my way from a telephone call where there may well be a hidden agenda? I think not. There are lots of opportunities out there for ingenious investment but genuine ones require you to be proactive, not reactive. I am reminded of the old adage – a fool and his money are soon parted. I ashamed to say that I have proved that to myself enough times in my life!
You have to take charge of what you are doing. Looking at stocks and shares for example, needs in depth knowledge. Can you read a balance sheet, absorb a company report, or do your eyes glaze over? Do you just look at price to earnings ratios? These are all historical. Some say that if a long term market p/e is above 20, the returns are likely to be too low but good if it is below 10. Well that’s fine if you look at established markets and companies. But because these indices are known to be under investigation by punters around the world, quite a lot of effort goes into ensuring they look good – gaming them as we say these days.
A company is not some anonymous group of clones but a collecton of individuals with experience, ability and leadership. Who are the directors, the senior managers, other investors? What other companies do they control? Can the company cover its debt and dividend? I won’t go into all the indices and tools here – most of them are fairly obvious and the main problem is remembering the vocabulary of it all – but keeping an eye on these is important, as is keeping your nerve.
Companies are continuously being scanned for exactly these things, across all markets. So should you follow that crowd? While insider trading is illegal, it goes on and inside – at least industry – knowledge is still a factor. You need to take a guess – is the rumour that you have just heard something new and you need to jump in, or has someone already piled into a share and then tried to get everyone else to follow them? Share trading is fundamentally unstable as it has positive feedback – the more people buy, the more the price goes up. Until the initiator dumps his shares in small amounts spread widely and at the same time – and cleans up. Your shares drop like a stone. Ouch.
People say that if you want to build a sensible portfolio of shares, you need 12 good shares. Too many more and you lose track; fewer and you may become hostage to the one that drops through the floor. It’s up to you in the end but you do need a system that can handle stocks and shares plus some of the more esoteric financial products. There are many platforms for online stock trading but there are also other things that can be traded. You may want to ‘play’ with exchange traded funds which are baskets of shares or indices. There are advantages to these – they are not only more stable than individual stocks but frequently there is no transaction tax to pay.
You may want to buy an option – an option to buy or sell for example if a price goes down or up to a particular value respectively. In the end we are really spoilt for choice these days because of the number of financial products, instruments or whatever you want to call them that are available. Options, futures and other derivatives are useful – the number of shares issued by a company is generally fixed so the price response is more volatile, particularly when there is heavy trading. But the number of derivatives that can be written is not fixed so they are a more efficient guide to price (they don’t come with dividend of course). Derivative trading has got a bad name mainly I suggest because few people understand the simple fact that any market depends on gambling. For every trade, some will gain and some will lose. The more fluid the market, the more accurate the price.
It pays to shop around and take some time to find out if the platform offers the sort of service that you will need but a decent trading platform, possibly within a tax-free wrapper, is essential to be able to buy and sell quickly.
I own very few (5) individual companies in my portfolio. In addition to my individual stocks, I own 10 mutual funds and 2 ETF’s. The limitation of investments is tied to the overall size of your portfolio. The only hard and fast rule I try to maintain is no individual stock should exceed 5% of my overall portfolio.