A stormy time to invest

A stormy time to invest
08 May 2013

In April, data showed that the US economy created 165,000 jobs, which was more than analysts expected. The unemployment rate fell to 7.5% from 7.6%, its lowest level in four years.

In Europe, the ECB cut its key interest rate by 25 basis points to a record low of 0.5%. Though the move was widely expected, analysts fear it may not be enough to revive growth and create employment unless it is accompanied by efforts to boost bank lending.

Over in Asia, India cut rates for the third time this year in an attempt to revive growth in its sluggish economy. The Reserve Bank of India (RBI) lowered its key rate to 7.25% from 7.5%, but said there was limited room for it to ease its policies further, due to high consumer price growth. Japanese markets fell as a weaker US dollar hurt exporters and prompted profit taking ahead of a long holiday week-end.

The S&P 500 finished the week at a record high, whilst the Dow Jones Industrial Average briefly rose above 15,000 for the first time.

Tough choices

When it comes to investing, you won’t be 100 per cent right in what you do even if you read and inwardly digest every article/book and pink newspaper. But if you figure out nothing else about investment, the key lesson to remember is that it’s your money, your needs (and the needs of those who depend on you) and your life that counts. Losing your hard earned savings is a cinch compared with growing them!

Defining where you want to be – really basic question here, but what do you want from your money? Who do you want to benefit? And can you afford to lose anything? Investing isn’t like rugby or bridge where you hope to score more than your opponents.

Know your goal

Always know what you want and where you’re going. Don’t be afraid to say that your aspirations are modest. And don’t be nervous to admit that you enjoy taking a risk if you do and when you can afford to. But don’t forget to put a limit on your more speculative investments.

Protect what you have – you’ll feel worse if you lose cash than if you miss out on an investment opportunity. The ‘safely first’ option can also apply to your life and salary! Insuring the first is generally inexpensive. Buying protection against losing your earning capacity is far more expensive, but needs considering if you’re the breadwinner of the family.

Always check on the cover you already have from other plans and from employment before taking on more.

Ditch those debts

Pay off the home loan – most people have mortgages. Getting rid of the home loan as fast as possible is the best risk-free use you can make of spare cash because you’ll save a fortune on interest payments. So ensure that paying down the home loan is at the top of your list of tasks.

Equally important, never remortgage to a larger loan to pay for an investment; or to buy a car; or to pay for a holiday. An investment must be consistently very clever to produce more than the interest rate on a personal loan, and such investments are very unlikely.

Win some, lose some

Accept losses – not all your investments will work. Some of them will fail to gain as much as the best or even the average. Others will lose money absolutely. As an investor you have to be tough. You have to accept that there will be days, weeks, months or even years when the signs are negative. But don't forget that a loss is only a loss (and a profit only a profit) when you close out the position by selling.

Don’t get too worried about newspaper headlines showing one-day percentage losses. The market typically goes down in big lumps and rises in bite-sized amounts. Quality is what counts. If your investment has real potential, stick with it. Otherwise, cut it out. Ask yourself if you can still justify the investment purchase you made.

What’s really tough is the first time you accept that you’ve backed a real turkey and the only exit is a fast one. But it’s like cutting out dead wood. You’ll come out knowing more, feeling stronger and looking happier!

Know when to sell

This is a really tough one, so set yourself some rules. What about selling when an investment makes a certain percentage gain or loss? Or giving it a fixed period of time? Or determining a need, such as a home improvement, family occasion or retirement, where you’ll require cash and then selling when the particular need arises? Over the next two articles I shall provide some basic tips to help you become a safer and better investor. Watch this space…

Comments

No comments.

If you are registered you need to log in to comment, if not, please sign up.

Author
Independent Financial Advisor
Facebook Feed
Related articles