Here is my advice to my daughter:
INVESTING
There is a good stockbroker in Dublin, Campbell O’Connor and Company. They send you the share certs – nothing fancy like nominee accounts unless you want to get into fancy investments - and that is old fashioned and good.
I do not buy unit funds - though they are popular with ‘retail investors’ (that’s us) - but unit trusts, for various reasons. A trust is a company which (like a fund) invests in a range of other companies, sometimes specialising in a particular kind of company, so the risk involved in choosing individual companies is lessened. But unlike unit funds, you can buy or sell shares in a trust just like in any company – by phoning the broker. And there are dividends just like a company.
There are also ETFs (exchange traded funds – that can be bought through a broker) which can be very specialised (e.g. there is one which invests in companies all involved in cybersecurity!) and also can be passive (e.g. invests in the Dow Jones index without choosing any particular companies in it). I have not invested in these so far – I am not sure I need them, some do not have totally upfront financing.
Sometimes we have invested in particular companies as there can be some good yields (dividends). A trust could yield say up to 4%, but a company could give say 6%. As regards yields, compare bank deposit rates of 2% from which DIRT tax of 20% is then taken. The same is taken from dividends at source, so you have finally about 1.5% (bank) compared with say 4.5% (company). [This no longer true of many UK companies - no tax deduction, you get the full div tax free.]Of course you can lose your investment, but if you buy shares in a big sound company for a long period, it is almost like being in the bank. Take say Glaxo Smith Klyne GSK pharma, yield 5.6%. There is also the possibility of using a system of reinvesting divs automatically if you do not need the income – the compounding effect of this can be great. Also remember the div can go up regularly for such a company, so you can end up getting an even better yield on your original investment. Mind you, there is an apocryphal story about the ten big companies that Fortune magazine listed in 2000 as the great ones for the new millennium – and that are all now gone! Remember Kodak? No, I said Kodak, not Kojac. Oh well, just forget it. Anyway, if a big company dies, it gives plenty of notice, and there is time to get out. Some of the Fortune ones were probably taken over anyway, good for their shareholders.
Bonds are loans issued by governments and companies. We did well out of Irish bonds when the country was still regarded as a risk (it was gratifying to read in the newspapers later that a famous US investor had bought them too) but they have gone up since because Ireland is now risk-free, which means that yields are too small to make them worth buying now. Worse, they might drop as interest rates generally are rising.
The amount of information available to the private (retail) investor is now tremendous. Take an example: Since you like reading about tech advances, you have read in Moneyweek mag [subscribe to it!]one of their great articles about latest global trends, in this case self-drive electric cars. You can go to the FT Financial Times online, and for free go to your fantasy portfolio [start one!]where you have made ‘investments’ in companies you have heard about as being hot things in this area. You know that self-drive electric cars are the next great thing, but do you invest in Google which can make the programmes, in Merc which can make the cars, in Tesla which can make the batteries or cars or in Albermarle which can mine the lithium ore for them? Well, better not any of them directly, especially as you see that some have dropped by 10-20% since you ‘bought’ all of them for your fantasy portfolio last year. Let someone else do it for you, so check out the main holdings of some technology trusts and lo, one good one has 5% of their money in Tesla, 3% in Google, so let’s leave them keep an eye on it all for you, buy 1000 shares in that trust, and (now let’s look up the yield, online, for that trust) ah yes get 2.5% per annum anyway while you hang around waiting for the cars - not bad. Apart from the FT website (free) we subscribe to Moneyweek (for a great read on world affairs too), and to an occasional FT on Sat – all worth it for even more info. This availability of info has empowered private investors, and the trend towards self-investing has also been assisted by new laws and tax incentives.
Shares can go down in value as well as up. You can lose some or all of your money. Past performance is no guide to future returns. Like ‘Smoking Kills’ on cig packets these warnings must be included at the end of any financial ads or advice. How do you live with them?
Shares can go down in value as well as up. Say you invest €2,000 in a unit trust and some months later it has lost 10% of its value. That is €200, ouch. But it is a paper loss until you sell. Before buying you made sure that you did not need to use the money at short notice. Or if you did need to, that you would be able to borrow from the Family (otherwise you might find a horse’s head in your bed). Also, at your leisure, you intend to buy shares in something else so that ups and downs in the portfolio can even out. Let’s imagine then that after a while you have gradually and thoughtfully bought shares in a couple of trusts and companies. They are indeed averaging out until aarrgh! the price of oil drops and the markets get a fright (scenario of Dec 2015) and everything drops so your portfolio is on average down 5%. You had €10,000 invested at this stage so the paper loss is now €500. Warren Buffett said once that the markets are like having a likeable but eccentric friend who comes in one morning in tears and wringing his hands shouting Sell! Sell! Next morning he comes in radiant and joyful shouting Buy! Buy! Enjoy his antics but ignore his advice. If you have cash in hand, consider buying some of those shares that you had in mind for a long time while the market was precariously at a peak and you were waiting for it to drop. An internet bookmark for the NASDAQ (US tech exchange) marked a few years ago gave the index then as 4050. The year 2016 has had the worst opening weeks for markets ever, yet today 25th Jan the index is at 4589 (!). Patience rewards. There is much written about the psychology of investing e.g. women make better private investors than men because they do not buy and sell so often – less trading. Men perhaps begin to enjoy it as a hunt or gamble - which brings us to small companies.
You can lose some or all of your money. Many ways of helping you lose some or all of your money are provided by small companies. Big companies can do it too (Anglo Irish Bank, Volkswagen) but small companies are dangerously attractive because they are often in exciting areas (self-drive cars, gene therapy…) and have faster growth – and go bust more often. There are gurus who recommend small companies, such as the famous Lord John Lee in the Financial Times Saturday ‘Money’ supplement. So after a year or so ‘investing’ in some companies recommended by him, in your fantasy portfolio, maybe you could put some money into one in reality, and meanwhile just consider buying shares in an appropriate trust such as JP Morgan European Smaller Companies Trust.
Past performance is no guide to future returns. This warns us of possible unforeseen events for a company, but also of market cycles.Trusts investing in so called emerging markets (developing countries) at the beginning of 2014, indeed anyone investing in 2014, would have done well. The year 2015 was bad for emerging markets, but Japan did well. If at the end of those years you looked up the performances of the fortunate trusts, you would have been given a very good impression, but had you invested in those trusts for the following year your investment would have been mediocre or at a loss. Currently (Jan 2016) commodities (oil, industrial metals), emerging markets, China, US, biotech are out of favour, while Europe, Japan are relatively in favour but only relatively. Financial journalists can more or less account for this situation, but no one knows when you should invest in e.g. Rio Tinto miner again to be in right at the next upturn of commodities (well, we wouldn’t anyway, would we, as it is an unethical miner). In general the markets move ‘3 steps forward, 2 steps back’, so again patience rewards if you are on a good thing long term.
INVESTING
There is a good stockbroker in Dublin, Campbell O’Connor and Company. They send you the share certs – nothing fancy like nominee accounts unless you want to get into fancy investments - and that is old fashioned and good.
I do not buy unit funds - though they are popular with ‘retail investors’ (that’s us) - but unit trusts, for various reasons. A trust is a company which (like a fund) invests in a range of other companies, sometimes specialising in a particular kind of company, so the risk involved in choosing individual companies is lessened. But unlike unit funds, you can buy or sell shares in a trust just like in any company – by phoning the broker. And there are dividends just like a company.
There are also ETFs (exchange traded funds – that can be bought through a broker) which can be very specialised (e.g. there is one which invests in companies all involved in cybersecurity!) and also can be passive (e.g. invests in the Dow Jones index without choosing any particular companies in it). I have not invested in these so far – I am not sure I need them, some do not have totally upfront financing.
Sometimes we have invested in particular companies as there can be some good yields (dividends). A trust could yield say up to 4%, but a company could give say 6%. As regards yields, compare bank deposit rates of 2% from which DIRT tax of 20% is then taken. The same is taken from dividends at source, so you have finally about 1.5% (bank) compared with say 4.5% (company). [This no longer true of many UK companies - no tax deduction, you get the full div tax free.]Of course you can lose your investment, but if you buy shares in a big sound company for a long period, it is almost like being in the bank. Take say Glaxo Smith Klyne GSK pharma, yield 5.6%. There is also the possibility of using a system of reinvesting divs automatically if you do not need the income – the compounding effect of this can be great. Also remember the div can go up regularly for such a company, so you can end up getting an even better yield on your original investment. Mind you, there is an apocryphal story about the ten big companies that Fortune magazine listed in 2000 as the great ones for the new millennium – and that are all now gone! Remember Kodak? No, I said Kodak, not Kojac. Oh well, just forget it. Anyway, if a big company dies, it gives plenty of notice, and there is time to get out. Some of the Fortune ones were probably taken over anyway, good for their shareholders.
Bonds are loans issued by governments and companies. We did well out of Irish bonds when the country was still regarded as a risk (it was gratifying to read in the newspapers later that a famous US investor had bought them too) but they have gone up since because Ireland is now risk-free, which means that yields are too small to make them worth buying now. Worse, they might drop as interest rates generally are rising.
The amount of information available to the private (retail) investor is now tremendous. Take an example: Since you like reading about tech advances, you have read in Moneyweek mag [subscribe to it!]one of their great articles about latest global trends, in this case self-drive electric cars. You can go to the FT Financial Times online, and for free go to your fantasy portfolio [start one!]where you have made ‘investments’ in companies you have heard about as being hot things in this area. You know that self-drive electric cars are the next great thing, but do you invest in Google which can make the programmes, in Merc which can make the cars, in Tesla which can make the batteries or cars or in Albermarle which can mine the lithium ore for them? Well, better not any of them directly, especially as you see that some have dropped by 10-20% since you ‘bought’ all of them for your fantasy portfolio last year. Let someone else do it for you, so check out the main holdings of some technology trusts and lo, one good one has 5% of their money in Tesla, 3% in Google, so let’s leave them keep an eye on it all for you, buy 1000 shares in that trust, and (now let’s look up the yield, online, for that trust) ah yes get 2.5% per annum anyway while you hang around waiting for the cars - not bad. Apart from the FT website (free) we subscribe to Moneyweek (for a great read on world affairs too), and to an occasional FT on Sat – all worth it for even more info. This availability of info has empowered private investors, and the trend towards self-investing has also been assisted by new laws and tax incentives.
Shares can go down in value as well as up. You can lose some or all of your money. Past performance is no guide to future returns. Like ‘Smoking Kills’ on cig packets these warnings must be included at the end of any financial ads or advice. How do you live with them?
Shares can go down in value as well as up. Say you invest €2,000 in a unit trust and some months later it has lost 10% of its value. That is €200, ouch. But it is a paper loss until you sell. Before buying you made sure that you did not need to use the money at short notice. Or if you did need to, that you would be able to borrow from the Family (otherwise you might find a horse’s head in your bed). Also, at your leisure, you intend to buy shares in something else so that ups and downs in the portfolio can even out. Let’s imagine then that after a while you have gradually and thoughtfully bought shares in a couple of trusts and companies. They are indeed averaging out until aarrgh! the price of oil drops and the markets get a fright (scenario of Dec 2015) and everything drops so your portfolio is on average down 5%. You had €10,000 invested at this stage so the paper loss is now €500. Warren Buffett said once that the markets are like having a likeable but eccentric friend who comes in one morning in tears and wringing his hands shouting Sell! Sell! Next morning he comes in radiant and joyful shouting Buy! Buy! Enjoy his antics but ignore his advice. If you have cash in hand, consider buying some of those shares that you had in mind for a long time while the market was precariously at a peak and you were waiting for it to drop. An internet bookmark for the NASDAQ (US tech exchange) marked a few years ago gave the index then as 4050. The year 2016 has had the worst opening weeks for markets ever, yet today 25th Jan the index is at 4589 (!). Patience rewards. There is much written about the psychology of investing e.g. women make better private investors than men because they do not buy and sell so often – less trading. Men perhaps begin to enjoy it as a hunt or gamble - which brings us to small companies.
You can lose some or all of your money. Many ways of helping you lose some or all of your money are provided by small companies. Big companies can do it too (Anglo Irish Bank, Volkswagen) but small companies are dangerously attractive because they are often in exciting areas (self-drive cars, gene therapy…) and have faster growth – and go bust more often. There are gurus who recommend small companies, such as the famous Lord John Lee in the Financial Times Saturday ‘Money’ supplement. So after a year or so ‘investing’ in some companies recommended by him, in your fantasy portfolio, maybe you could put some money into one in reality, and meanwhile just consider buying shares in an appropriate trust such as JP Morgan European Smaller Companies Trust.
Past performance is no guide to future returns. This warns us of possible unforeseen events for a company, but also of market cycles.Trusts investing in so called emerging markets (developing countries) at the beginning of 2014, indeed anyone investing in 2014, would have done well. The year 2015 was bad for emerging markets, but Japan did well. If at the end of those years you looked up the performances of the fortunate trusts, you would have been given a very good impression, but had you invested in those trusts for the following year your investment would have been mediocre or at a loss. Currently (Jan 2016) commodities (oil, industrial metals), emerging markets, China, US, biotech are out of favour, while Europe, Japan are relatively in favour but only relatively. Financial journalists can more or less account for this situation, but no one knows when you should invest in e.g. Rio Tinto miner again to be in right at the next upturn of commodities (well, we wouldn’t anyway, would we, as it is an unethical miner). In general the markets move ‘3 steps forward, 2 steps back’, so again patience rewards if you are on a good thing long term.
