Recently I spoke to a young chap about his financial investments. He shared with me how he plan to invest in the stock market. Being of a young age, I applaud his plan to start growing his money early in his life.
There are indeed unavoidable things we need to take care of to bring clarity into our stock investments.
The discussion reminded me of past conversations I had with similiar young savers and growers. There are things I asked them to look out for. These are indeed unavoidable things we need to take care of to bring clarity into our stock investments.
First is to find out whether we are traders or investors. Traders ride on the market sentiment and are always short term. They need to form a view of the market by gut feel. They buy if they feel that the market is going higher or sell if they feel the market is going lower. They are usually momentum focused.
First is to find out whether we are traders or investors.
Investors ride on the market data and are always long term. They need to form a view of the market by analysis. They buy if they calculate that the market is undervalued or sell if they calculate the market is overvalued. They are usually fundamentals focused.
A good way to find out is to read the two classics – and find out which style we identify with as well as to find out in advance what sort of experience we can expect.
Alchemy of Finance – Trader type
Common Stocks and Uncommon Profits – Investor type
Next is to calculate our returns in a proper manner. We do this by annualising our return net of transaction fees. A common mistake is to not annualise our returns or to take into account our losses. We remember the one stock that gained us 100% but do not account for the time the money was idle and not generating returns or the time we lost money in our investments.
Next is to calculate our returns in a proper manner.
We also need to remember there are transaction fees (brokerage fees, contract stamp and clearing fees), which buying and selling on a small scale usually costs about 1% depending on different brokers.
This way, we can compare with some publicly available investment data and gain clarity into how well we are actually doing. For example: did we do better or worse than a K Fund in a 1year, 3 year, 5 year basis with the following results:
Thirdly, we find out the amount of risk we are taking with our investments. Outsized returns is not uncommon when we bet in the right direction. It is therefore important to know whether we were lucky or we are really good. Find out the number of stocks we owned, and segment them by sectors and industries.
Thirdly, we find out the amount of risk we are taking with our investments.
A guideline given by a study is about 20 stocks for proper diversification. And they do need to be all in different industries. So if an oil and gas crisis that hits O&G stocks or a financial crisis that hits financial stocks or a property downturn that hits property stocks, you will still be fine.
For benchmarking practice, we take Fund K again, for the performance described above, it is
With these three things in mind, we can then get more clarity on our stock investments, our attitude, our returns and our risk exposure.