Everyone is looking for a quick and easy way to wealth and happiness.
Having worked in finance and investment banking for over 20 years, I can testify to the fact that many intelligent investors have been made fools of by the stock market.
I will refer to shares — which is basically buying a small amount of a company such as Apple — but for the purposes of this article, the word shares can include things like bonds, which is buying into the debt of a company or country, or alternatives such as oil and gold.
My advice to anyone looking to invest is to reflect on three things.
Firstly, why are you investing? Is it for a pension or for your children’s education or something else? The roadmap for these could be completely different in terms of what you should invest in.
Also, you need to determine your timeline for investing. The shorter the term will have a bearing on the types of companies or investments you may consider.
Finally and probably most importantly, you need to determine your risk tolerance. What one person may tolerate as an acceptable level of risk could cause another person sleepless nights.
Here are several tips that should be followed by investors particularly those starting out.
You should initially decide on a stockbroker to use and try to ensure the costs of transacting in shares are kept to a minimum. This is particularly important if you are investing on a smaller scale, as fees can effectively wipe out any gains or accentuate any losses.
There are online stockbrokers that offer an execution type service, such as Dutch brokerage Degiro. They are extremely cheap to use to buy and sell shares and this type of account is very useful when you know what you want to invest in.
Companies such as Davy’s and Goodbody’s are more expensive but offer an advisory service that will assist you in picking shares or building a share portfolio.
For smaller investors, typically anyone investing less than €50,000, I would research first and suggest avoiding the bigger companies as these will charge significantly more.
Whether it is €1,000 or €1m, aim to diversify. You diversify your investments by way of investing in a few companies and looking at different sectors and types of companies.
This is a way of managing risk and ensuring that you don’t suffer significantly if a company’s share price falls in a short period of time. I have seen many that bought Irish bank shares when they were still above €5 because they “couldn’t possibly fall any further”.
These same shares fell to below €1. In more recent times, I saw people investing in cryptocurrency last December when they were at their all-time high and now are sitting on about a third of what they put in.
So is now a good or bad time to invest?
Legendary US investor Warren Buffett said it is easier to look back than into the future.
While a lot of investors are predicting a stock-market correction, with some going as far to say there will be a crash, it is really difficult to say what is going to happen over the next couple of years.
I attend a lot of investment seminars and some very educated and very well paid people have given me compelling arguments for both a bull run (when markets go up) to a bear run (when markets fall).
One thing I think we can say with certainty is that there will be a lot more volatility (up and down movement of the values of shares) over the next couple of years, than we have experienced in the last 10 years, since the last massive correction.
However, given that we have experienced two mini corrections this year in February and October, I don’t think it is necessarily correct to say now is a bad time to invest.
Buffett would argue that you should only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
Unfortunately, a lot of us look for a quick gain and this is why they should probably leave money in the bank.
Investing for a short period and expecting to make money is like expecting Ireland’s soccer team to win the World Cup. While it is possible, it is highly unlikely.