Invest in shares with a level head

Investing in shares of listed companies can be both rewarding and depressing. If you trace the history of share investment over a long period, the average returns from share investment always outperformed the less risky investments such as bonds for example. There is potential upside to companies’ shares because of growth in the companies and some can be spectacular. These companies are well managed and stay ahead of competition, changing with the times. At the other extreme, we have also heard of spectacular collapse of seemingly good companies but due to mismanagement, the companies were wound up.

 

Share investments are sensitive to the economy of the country and the world. During the crisis year such as 2003/04 resulting from the Iraq war and SARS in the region, Singapore took a hit on economic growth. The Straits Times Index (STI) on the Singapore Stock Exchange (SGX) dropped to a low of 1700.33 on 17 May 2004. Share values lost grounds across the board as investors pull out of the stock market. By now in 2006, the STI index has climbed to a high of 2745.31 on 10 Nov 2006, a 1044 point jump! If you have stay invested in 2003 till now or bought into blue chip shares in 2004, you would have reaped huge capital gains on your shares. Share investors in most cases follow the herd instinct and follow most investors. Sell when all are exiting and buy when all are buying them. This is not a wise way. If you have selectively bought shares of good companies in 2004 and in 2 years, you would have seen the shares have appreciated handsomely.

 

The key to share investment is to do your own analysis of companies you are investing. You ought to know the businesses the companies are in. If you do not understand the business, don’t invest. Read up their annual reports and watch out for news of the companies in the media, on the SGX website and the on-line share broker’s website.

 

Of course, we will encounter companies who were once “darlings” in the stock market and suddenly fell because of company mismanagement. At some point, you will have to cut loss and divest quickly and do not remain sentimental and hope that the share will recover someday to the level you have known. That day may not come! When counting your losses in share investment, look at your total share investment portfolio and not focused on specific share investment.

 

Share investment requires your attention and if you are not able to monitor the share market, it will be wise not to go into share investment in a big way. A small proportion of the investment funds can go into buying of shares and this amount is something you can afford to lose. Furthermore, if you have invested in unit trusts, you already have stay invested in shares and enjoy the potential of capital gains on your funds. (See my earlier blog entry on unit trust.)

 

Written on 11/13/2006 9:39 AM

 

Copyright © 2006, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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