Now you have a opened a trading account with a few mouse clicks. When you transfer your money in you are ready to start. Buying shares is easy, but buying something does not mean that you make a profit. Just like with sports, investing requires dedication and you have to invest time and money in order to ultimately succeed, and of course you have to be lucky.
A simple way to delve into investing is by reading a book. Popular among both novice and advanced investors is the evergreen Investing for Dummies, written by the author of this article. Don’t be shocked, this article will not be a book review. We would like to share a few learning
points with you.
Sport and investing
So sport and investing have a lot in common. And there is another parallel. When building and maintaining an investment portfolio it can be useful to think like a coach; a soccer coach for example. A coach does not send ten keepers and one attacker into the field, but ensures a balanced team.
This also applies to investing. So keep cash in the bank and on the goal for financial rescue, make sure that you are at the rear with, in my opinion, relatively safe bonds and create a midfield with shares, investment funds and ETFs (index funds). At the forefront you can possibly set up turbos or options for extra returns. Note that in general, a higher return comes with a higher risk.
Distribution across asset categories
Next, it is important to think about how you divide your assets between the available investment products. That can be quite a challenge. Understandable, because building and maintaining a portfolio is not part of their daily work for most investors. What helps: in addition to cash, limit yourself for convenience to the main categories of shares and bonds.
Subsequently, the following rule of thumb can provide guidance that is often used in the investment world: invest your age in bonds. If you are 43, invest 43% in bonds. For example, if you hold 5% cash for unexpected expenses, then 52% remains to invest in shares.
For the sake of clarity, this is a rule of thumb and the outcome is not cast in concrete. Of course, the final distribution across the asset categories depends on your personal risk profile.
Those who apply the rule of thumb, however, shift the portfolio’s risk with the passage of time from shares (higher risk) to bonds (lower risk). In professional terms this is also called lifecycle investing. You take less and less risk with your investments as you get closer to your target date on which you want to dispose of your assets to, for example, repay the mortgage. In practice, I notice that the rule of thumb, in addition to support, also offers investors peace of mind. And peace and quiet, in my opinion, returns are often beneficial in the long term.
Which analysis form do you use?
The broad lines for a balanced team and the rules are known, but how do you select the right players? With a broad midfield consisting of investment funds and ETFs, you can easily spread smartly. However, before you buy an individual stock or bond, it is important to make an analysis to justify your decision. You can use various forms of analysis for this. The best known are the fundamental and technical analysis, often referred to as FA and TA. These two movements are roughly opposite each other.
Technical analysis revolves around the question “when should I buy?” And is about timing. Fundamental analysis is the acquisition of knowledge of and insight into industries and individual companies and provides an answer to the question “what should I buy?” This latter form of analysis is ideally suited for the rear-guard and midfield. The more fleeting nature of the vanguard can best be “tackled” with TA.
A selection of fundamentally good shares takes place in steps, whereby you filter the information through a funnel. The first phase of the selection process concerns the level of the international and national economy, the macroeconomic level. The most important question is: in which region or countries is it economically summer or winter? The development of the “gross national product” (GDP) and employment (unemployment) are two variables to keep a close eye on.
The main focus of the analysis is on the meso and micro phase. With regard to the mesophase: the growth prospects of an industry are strongly determined by the phase of the life cycle in which the products or services of the industry are located. The most relevant issue is therefore to find out in which phase a company (branch) is.
Last, but not least: the micro phase. It is important to learn how to interpret the profit figures of companies and the financial sit
measure and assess the situation of a company. For equities and bonds, this is possible with financial key figures such as solvency (financial health) and profitability (profitability). In addition to these ratios, calculations can be made that provide information about the price and the return of a share. Accounting data and market data are used for these ratios. To determine whether a share is worth buying, you mainly look at the earnings per share, the price-earnings ratio and the dividend yield.
Technical analysis has two variants: visual and statistical technical analysis. In the visual variant, graphs of historical rates are studied, in the statistical application calculations are made on series of historical rates. In both cases with the aim of charting the most likely price trend. Note that Technical analysis is only a tool and of course has no 100% predictive value.
One of the most important tasks is mapping the trend. It can be falling, rising or sideways. This can be done by looking at the progress of the graph, or by making calculations such as the moving average. In addition to mapping the trend and determining support and resistance levels, technical analysts are always looking for patterns that suggest a change in the rhythm of the market. Such a trend break can be interesting to play with options and turbos, or the forefront.
The importance of dividend on shares
An important part of your total return is dividend. It is useful to pay attention to this when selecting your midfielders.
If a listed company makes a net profit, it may choose to distribute (part of) that net profit to the shareholders. Such a profit distribution is called a dividend and takes place at least once a year. Some companies pay dividends every six months or every quarter.
In the long term, the total return of shares (within the portfolio) is largely determined – between 30-45% – by the dividend (source: Empirical Research Partners, Global Portfolio Strategy, June 2016). Crucial in my opinion is the reinvestment of dividend in the underlying shares. It is certainly not only about price gains.
The same applies to coupon interest rates on bonds. These money flows also make an important contribution to total return in the long term. The effect is enhanced if the coupon rates are reinvested.
The information in this article should not be interpreted as individual investment advice. Although Academy for Investors compiles and maintains these pages from reliable sources, Academy for Investors cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk. We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks.
Kaspar Huijsman is the director of Academy for Investors. A seasoned expert in investment, he offers seminars throughout Spain and Portugal and online.