MONEYWISE November 1, 2013

Bermuda Investment Primer Chp1 part 2

Another segment in the Bermuda Investment Primer Series.

The United States capital market S&P Index* reached an all-time high last week then settled back by Thursday, o’Halloween Day, 31 October 2013 as this article went to press. The S&P index value has grown by an almost 25 percent appreciation in one year. Investment returns at this time appear enticing, compared to plain-vanilla low interest rate term deposits.

Retail investors are remaining confident in the US market according to CAQ, the Center for Audit Quality, even though investor confidence in publicly traded companies peaked prior to the now-over US government shutdown. Market tracking service by Investment Company Institute’s (ICI)** statistical reports for October 2013, reported large cash inflows from investors into equity mutual funds at month end. According to MSN Money,*** Charles Schwab reported that retail investors are back, the third quarter results were best summer performance in the history of the company

Are you interested in investing? How will you know when to make the investing decision? Should you jump in, following the herd — when markets have a certain euphoric feeling as though all is well with the world? Or, should you wait until market prices are lower, economic news is negative and you can feel as if you are getting a bargain? How can you tell the difference?

How will you know what to compare to in “higher” prices for an individual stock? Should it be compared against its prior performance, against the share value of a comparable industry player, or compared to its original issue price? Did the share value rise because of the company profitability performance, or is it a case of all stocks rocketing upward together when an overall market climbs?

True story. Place and circumstances changed, of course. Once there was an individual client who was very interested in investing (generating a higher return for his savings), but he tended to be very cautious with his money. Not that there is anything wrong with that. So cautious, however, that he stated on numerous occasions that he was not ready to invest “just yet” because he had to be sure to time his market entrance to get “the best price.” Eight years later, after endless discussions of choices and strategies, he still had not invested one penny in any capital market. It was gradually understood that this gentleman did not really want to invest; he just wanted to talk about it. In retrospect, quite frankly, he instinctively did the right thing. He was so risk-averse, worried about losing even a penny by investing in instruments that he didn’t understand, that he could not bring himself to cede control of any of his cash into a nameless, faceless moving target. He did not belong in any volatile investment market. Term deposits were just fine for his personality, temperament and lifestyle. And, no there was no commission-based fee involved for the advisor.

The real answer to when you should consider investing is not related to any specific market performance. In fact, jumping into a rising market that may be close to its high, because it is there and happening now, is probably the worst reason to invest. Yet, many, many investors made this mistake during the high-tech boom (and bust) of the early 2000’s. Your decision should be based upon careful reasoning and consideration of how investing will fit with your personal financial profile.

You are not a candidate for investing, unless you feel comfortable

• That you have a large emergency stockpile of easily accessible cash;

• That you can meet your household expenses and any large liabilities, such as a mortgage without having to cash out your investment base suddenly, and precisely at the wrong time — meaning taking a unplanned loss;

• That you are not in serious danger of being made redundant;

• That you have educated yourself on the basics of investing, or are working with a professional advisor that you trust implicitly;

• That you have the patience to invest for the long-term understanding that markets, like businesses, operate in cycles.

• And that you have a source of funds that you can afford to lose, in an absolutely worse scenario market crash.

There is nothing worse than watching daily stock market volatility, knowing that even an unrealised loss will cause you significant physical and emotional stress.

You decide that you have met all of the investing candidate requirements above. You are ready to learn about the securities and what will be the most appropriate investments for you. Then, you will carefully make the decision to invest your hard-earned money.

But, what should you invest in? Your education in investment vehicles starts now.

A book to get you going. ‘Learn to Earn’, by Peter Lynch. “Everyone has the brain power to follow the stock market. If you made it through fifth-grade math, you can do this.”

Investing 101 at Investopedia. http://www.investopedia.com/university/beginner/

Next article: we compare passive index funds versus mutual funds.

* According to www.Bloomberg.com, “the United States Standard and Poor’s 500 Index is a capitalisation-weighted index of 500 stocks. The index is designed to measure performance of the broad US domestic economy through changes in the aggregate market value of 500 stocks representing all US major industries.”

** www.ici.org The Investment Company Institute is the national association of US investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $15.2 trillion and serve more than 90 million shareholders.

CAQ http://www.thecaq.org/newsroom/2013/10/10/caq-survey-investor-confidence-in-US-publicly-traded-companies-peaked-prior-to-shutdown

***MSN Money, Benzinga, October 16, 2013 http://money.msn.com/top-stocks/post—schwabs-results-show-the-retail-investor-is-back

Martha Harris Myron JP CPA PFS CFP is a Bermudian journalist and a cross border financial planning specialist focused on offshore financial perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre.

President of Pondstraddler? Life™ Consultancy.

Publications & Presentations: International consultant on cross border financial planning.

www.pondstraddler.com

Inquiries to info@pondstraddler.com