Understanding Your Investments

Understanding Your Investments

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We often think of the new year as a fresh start – the ideal time to take a close look at your investments and financial situation. When it comes to investments, many pore over their portfolio – likely flat after crummy returns for almost everyone in 2018 – and ask the key question: “How can I do better this year?”

Our new book, Cherished Fortune, offers a delightfully straightforward solution – though to many investors bamboozled by the Niagara Falls of data that comes from capital markets every day, it might be difficult-to-fathom advice: know what you are buying and why. It’s the opposite of crossing the street blindfolded – which is what many investors do when they take advice without understanding it.

Our model is a humble shopkeeper who knows the goods for sale, the customers, the competitors, and the profit margins on every item. Contrast that with the masses of data coming out of markets every day: the Dow, the NASDAQ, the S&P 500, relationships between the price of oil and the profits of companies that lease oil rigs. Even for experts, this stuff is difficult to process – and almost impossible for the individual investor to get right. We have a different approach – risk management with the goal of improving the odds of making money, and reducing the odds of losing it.    

The conventional view of throwing money at companies’ stocks or bonds is that if you get two-thirds of your investments right, you’ll make money over the long run. Sounds good, but those odds would frighten most folks away from taking airplane flights with a one-third chance of disaster.

You have to invest – and you have to do it yourself to improve the odds. Doing nothing with money – such as leaving it in a bank at about a zero percent return even before inflation, or a Guaranteed Investment Certificate at perhaps 3 per cent for several years and nothing after tax and inflation, is no way to live, much less to get ahead. Inflation will kill your buying power.  Lose 3 percent a year for a decade and you are down 30 percent. You have to invest to survive.

Stock returns average 7 per cent a year before inflation, about 3 per cent to 4 per cent after inflation. But which to buy? In Cherished Fortune, we suggest starting with what you know – one company, perhaps a bank or a real estate company. Read the annual reports, read what others say in research papers, talk to people who work there if you can. Treat the business in which you may put hard-earned dollars as your own business. That is how you reduce risk.  Don’t put more than 5 or 10 percent of your available capital into any one company.

Make sure every company pays a sustainable dividend of 3 to 4 percent or a little more. That way, you are paid to wait. If the company has a history of annual dividend increases, so much the better. In short, don’t just stock one product in your store. Instead, as you grow your knowledge and wealth, get a feel for other companies.  .

Start small, do it yourself, and manage your risks by growing your knowledge and you are likely to avoid the worst traps – like gold mines with no gold, oil traders with no oil, salad dressing empires with no dressing – all recent scandals that had professional analysts believing published but fraudulent numbers.

In Cherished Fortune, we offer investors a roadmap to becoming a well-informed and hopefully prosperous investor. Its core advice is simple – and ideal for those New Year’s resolutions – know what you are doing and don’t do what you don’t understand.