People always ask me “TANA what is the best thing to invest in right now” and I always respond with a profound “it depends”. I also answer with my tried and tested investing mantra: “Buy Low, Sell High”
In addition to not wanting to end up in Remand Yard (Raymond Yard to some) for dispensing investment advice without being a registered advisor, it’s actually a more difficult question than they think. In any case I believe in the old adage, “give a man a fish and he will ask for dumpling, teach a man to fish and he will raise prices every Easter”…or something so.
Anyway, rather than make a bunch of 10-15 minute videos that only 10 of you might watch and 3 of you share, I decided to do an old fashioned written post summarizing what you should be thinking about when investing.
Careful what you ask for….
Investing is about risk and reward, the higher the risk the higher the reward. Trinis are the only people who think investing should come with some sort of guarantee. No wonder these New Sou Sous are so popular. There’s even a local mutual fund company that has a price guarantee on an equity fund, probably the only one in the world.
The first step in investing, other than having money to invest, is knowing what kind of investor you are, aka your risk appetite. Risk appetite is basically how much risk you’re willing to take. Us financial types assess that using the ever popular “on a scale of 1 – 5, how likely are you to eat a cold roti with a warm Supligen?” type questions.
Then you need to understand how your stage in life affects your investments. I won’t bore you with the details but there are three main stages of an investor’s life cycle: accumulation, consolidation and spending/gifting phase. Each calls for a different mix of assets known as your asset allocation. All you need to know is that the younger you are the more risk you can take. The closer you are to retirement the less risky and more stable your investments need to be. This is called Risk Capacity or how much risk you should be taking. Basically if Soca in Moka is a bess fete for you then you shouldn’t be investing in risky cryptocurrency or dabbling in forex trading.
Ok, so now you need to figure out your liquidity needs so that you don’t end up over investing and have to break an investment, pay fees and penalties to fund a pack of pampers.
I can hear you thinking “TANA, we are yawningly weary of the preamble, how do we actually evaluate an investment?” I get it and if you decide this is all too much for you then you can speak to a professional advisor and have them invest your money for a fee. If that is your flick then you can stop reading here.
If you deicde you have a “big brass pair” and want to do your own thing then read on…
You need to decide your approach to analyzing an investment. There’s basically two, top down or bottom up. Top down starts with the economy, drills down to which industries would do well in whatever part of the business cycle the economy is in and then which companies would do well in those industries. Bottom up starts with raw materials prices, volumes, sales and other micro items that affect companies and tries to figure out which companies would do well.
You also need to decide if you’re investing to maximize current income or price appreciation or both, which is called a balanced approach. For current income high dividend paying stocks, high interest bonds or investing in rental properties are all good choices. For price appreciation you can look at stocks with good growth potential at an attractive price.
How do you figure out those things? Well, certainly not by following who horning who on social media or who have the better letter writing skills. You have to be able to analyze financial statements, comparables, charts etc.
You should also understand the different asset classes; stocks, bonds, mutual funds, ETFs, real estate, crypto, forex, commodities, alternative investments etc. I’ve written more detailed posts on some of these asset classes in the past and I plan to bore you to death with more in the future.
Remember to view all your investments as a portfolio not as individual assets because diversification reduces risk, due to less than perfect correlation nah (doh study it). However, too much diversification can also reduce your return. Some big sawatee investors suggest a portfolio of 10-15 stocks in varying industries is the right amount of diversification but TANA didn’t say it eh.
It is important to start investing as soon as possible because compounding is the 8th wonder of the world. Compounding is earning interest on top of interest. It’s like getting a twin chenette or that extra finger attached to your pinky. So much win!
BONUS: Just to make sure you’re completely confused, you should understand Time Value of Money as it is key to the valuation of any investment. The value of any investment is the sum of the value of the future cash flows from that investment brought back to today’s value using an interest rate that reflects the risk of that investment. 😳
Finally, you should invest consistently, as dollar cost averaging, which is basically investing the same amount each period regardless of price, ensures that you buy more assets when prices are low and less when prices are high. Thus reducing your overall average price and increasing your return.
Ok, so that’s the basics of investing. You probably wished you never asked huh. If this was too much for you then speak to a professional and have them do it.