Updated Shareholder’s to-do list06.08.2012
In the long term, stock profits are based on company profitability and growth, reflected as dividends and increased stock value. Nearly all of the companies producing the best value for their shareholders have one thing in common: better than average stock profitability and growth. Understanding businesses prevents you from making the mistake of selling the shares of healthy companies with a strong foundation on a bad day.
2. Make long-term investments
If you want to sleep peacefully during rumours of scandal and plummeting stocks, comply with the principle of “buy and hold”. Short-term investment profits depend on luck and skill. Quick profits require serious work. In the long run – even in this stormy 21st century market situation – stock investments have provided moderately good profits.
3. Know your financial situation as a whole
Stock investments are only a part of your assets. Your income, debts and assets all affect the risks you should take on the stock market. Make sure that you do not hurt all your finances if you lose money on an investment. In this way, you will not need to sell any stocks at cut prices at a bad time, but can wait until the share values are up. In addition to stock investments, tie some of your assets elsewhere: deposits, bonds, bond funds or real estate investments, for example. In this way, you will be prepared for any market risks.
4. Do not take unnecessary risks
Consider whether you are the sort of person who likes to take risks. Do not invest any money that you cannot afford to lose on the stock market in the next few years. Then again, if you want higher profits than government stocks can provide, you have to be willing to take chances. Taking controlled risks can increase stock profits. However, it is not wise to invest more money than you can afford to lose on high-risk targets. Investing borrowed funds further increases risks.
5. Remember liquidity
Consider how quickly you can convert your investments into cash. Liquidating assets invested into apartments and real estate can take months. Shares can provide cash relatively quickly, but you will probably have to take reduced prices if you are in a hurry. If you know you might need your savings for other use quickly, keep them in a bank account.
6. Consider stock sensitivity to forecasts
The affect of financial forecasts on stocks varies according to industry. That is why converting shares into cash is relatively safe at any time. Industries particularly sensitive to forecasts include forestry, as well as metal and mining industries, all familiar to Finns. Industries that are less sensitive to forecasts include convenience goods trade, environmental services and the medical industry.
Then again, stock oscillation provides investment opportunities. Oscillation in the Helsinki Stock Exchange prices is caused by the forecast-sensitive Finnish basic industry and the country’s location on the border of Europe. That is why you can sometimes by high-quality stock here for very low prices.
7. Decentralise your acquisitions time-wise
Traditionally, it has been considered good to buy when the times are bad and to sell when things are looking brighter. However, the correct timing of sales and acquisitions – i.e. anticipating the turning points of rises and falls – is extremely difficult. Regular, monthly purchases help you to avoid the risk of investing in highly-priced stocks only. In this way, you can reduce the significance of timing for your actions.
When selling and buying, remember to consider the impact of trade costs and taxes on the profitability of your actions.
8. Decentralise your portfolio
Invest in no less than ten companies in different industries. This will help you reduce any risks related to individual companies or specific industries, since good investments balance weaker ones. Investing in a single share is a much like a raffle. However, be sure to monitor your expenses: if you have little capital, you will do wisely to invest in funds.
9. Avoid crisis industries and companies
Pull back from crisis industries in good time. You should not hold more than possibly a few “seasoning” shares of crisis-stricken companies waiting for a turning point, such as Nokia.
However, it is alright to even pay slightly over-market price for high-quality company stock – if the market is not overheated, stock profits from high-quality companies may pay back the additional costs as soon as in 2–3 years.
10. Remember stock funds
Stock funds are suitable investment targets for people who lack the time or skill to monitor their investments and the market personally. They are also suitable for relatively small investments.
The main strong point of stock funds is that they are already decentralised. However, remember to consider fund expenses: passive index funds incur fewer expenses than active funds maintained by a portfolio manager. Always bear in mind that not all portfolio managers can outwit the market, because they form the market.
Text: Jussi-Pekka Aukia
Shareholder’s to-do list updated by Henri Elo, Chief Analyst for Balance Consulting and a blog writer for Kauppalehti.