Primarily an equities trader, I have met many retail and institutional clients with diverse investment objectives. Some trade for the short- or long-term, others are either risk-averse or takers. After knowing their risk-return profile, it is important to differentiate those who are willing to invest against those who are only speculating. Investing is when an investor buys an asset with extra money, and anticipates return via income or capital appreciation over the long haul. Speculating, meanwhile, begins the moment an investor buys stocks, possibly with the use of borrowed funds for quick trading gains.
Given the present investing environment, however, obtaining double-digit returns has become difficult. To survive nowadays, diversification is key. The Asian financial crisis has taught us not to put all our eggs in one basket. As a result, investors are constantly seeking for new instruments.
One of the better alternatives for conservative investors like me is Mutual Bond Funds. Mutual Bond Funds are managed by a group of fund managers, most of them Certified Financial Analysts (CFAs), who decide which government and high-quality corporate bond securities to invest in. Because Funds pool all the investors’ monies, individual investors have more leverage, being able to buy fixed-income instruments with better returns, normally not accessible to them individually. Performance is gauged in terms of Net Asset Value (NAV) per share, or the difference between returns from assets managed and expenses incurred in managing these investments. These NAVs appreciate over time, and are best suited for long-term investors. Of the top three Mutual Bond firms, one-year returns have averaged within a range of 7.5 to 9.5 percent, tax-free. The investment decision in Mutual Bond Funds is structured, as due diligence is carried out, the risk-return profiles of investment instruments are regularly assessed, and heavier weight is given on assets that provide better returns.
Meanwhile, aggressive investors who aim to be the best and rarest of the breed go for equities trading. The stock market allows one to test skill and patience, as well as the ability to calculate risks by timing when to fight and when to run. Although equities have lost much of their luster in the past few years, I believe returns can still be made over the medium to long-term. If we select fundamentally sound large-cap stocks, for example, dividend payments have averaged between four percent and seven percent in the past two years. And it is just a matter of time before the stock market recovers, given the better-than-expected bottomline results of some listed companies.
Lousy stock trading executions could cost you money, but not if you learn the ropes of smart trading. Thanks to the Golden Age of the Internet, the individual investor is much more educated today, as information is disseminated faster online. It’s like bringing your hands to the pulse of supply and demand on stocks where opportunities are created. Furthermore, proficiency in reading through technical charts by analyzing the volume supporting any given price, and understanding the underlying implications of news accompanying them are made easier with the amount of data accessible online. Finally, stock trading is also a test of objective judgment. But as in any form of investment, however, one has to do his homework diligently to select opportunities carefully.
Given the defensive nature of today’s economic environment, diversification becomes all the more important to shield one’s self from the uncertainties brought about by world events. Personally, I am quite happy with the performance of my Mutual Bond Fund over the past year and a half, while I scout around for other instruments and await the revival of the stock market. All told, proper investment strategies are made by constantly studying each headline, and interpreting it correctly to determine where potential plays exist. Knowledge will help you learn how to invest and gain the necessary confidence to execute specific strategies.