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Cutting through all the economic jargon and stockbroker waffle


Prionsias O'Mahony - The Southern Star News,

Saturday March 1st, 2008

Prionsias O'Mahony tells us all (or nearly all) we need to know about stock market investment (in layman's terms)

EVERYTHING you need to know about stock market investment in a solitary article - impossible surely? Well, maybe you won't find out everything in such a short space but you'll get to know more than enough to profit from it. What's more, it's not even difficult. Sure, all that economic jargon and stockbroker waffle is tedious, but you don't need to know any of that stuff anyway (in fact, you're probably better off not knowing it).

  • Why should I invest in the stock market? Isn't it safer to have my money tucked away in a bank?
    The risk is in leaving your money on deposit, not in making a long-term stock market investment. Inflation eats away at savings. Not only that, the stock market has historically provided better returns than property. US markets rose by over 10% per annum in the 20th century.
  • Don't you need to be an expert to make money from the stock market?
    No. You don't need to know diddly.
  • How so? You can't expect to make a mint by investing in, say, art if you don't know your stuff. Surely it's the same with the stock market?
    You don't have to pick the individual stocks yourself, you can buy into a diversified fund. Over the long run, markets tend to rise so you just buy and hold, adding in times of weakness. Don't waste your time trying to figure out about price-earning ratios and all that stuff. Not only is it boring, it won't help you to secure better returns.
  • I've seen expensive courses on stock market investment. Should I consider them? Will they teach the secrets of Warren Buffett?
    Like I said earlier, you don't need to understand anything about the stock market to profit from it. Secondly, run a mile from any course that talks of "secrets" - that's just cheesy sales spiel. As for Warren Buffett, the world's second richest man has an expertise that you'll never attain so don't bother trying to. In fact, Buffett has said on many occasions that ordinary investors should buy into index funds.
  • OK, so I should be looking at a fund that spreads the risk rather than picking a couple of stocks myself. What kinds of funds are available to me?
    Managed funds and index funds.
  • What's the difference?
    A managed fund is a fund whereby a professional fund manager buys a bunch of individual stocks in the hope of securing market-beating returns. For example, the stock market might rise by, say, 10% in a year. The manager hopes to do better than this. To quote from one website: "Like fixing your car, or renovating your home, it boils down to a simple question. Do you want to do it (investing) yourself, or will you get greater value by paying professionals to do it?...stick to what you do best and put professionals to work for you." An index fund involves no analysis - the fund simply tracks the overall stock market.
  • I'll go with the managed fund so. Those guys do it for a living so they should do better than the market, right?
    Wrong. Never mind the guff I just quoted; over 80% of managed funds under-perform the market. There's not a finance professor on the planet who'll recommend a managed fund instead of an index fund. Index funds are the way to go - end of story.
  • How come? Surely these fund managers are smart guys?
    They're not half as smart as they pretend, although that's not really the issue here. Think of it this way. The daily fluctuations on the stock market are, for the most part, caused by the buying and selling of the big managers. Small investors don't have a huge impact. You can't expect each fund manager to beat the market - they are the market. Therefore, it's naive to think that more than half of all managers will beat the market - they can't all outperform each other.
  • OK, but how come over 80% under-perform? Surely you'd expect the figure to be closer to 50%?
    Say the market goes up 10% in a year. Most funds will increase by a similar amount. Of course, a figure of between 1.5-2% is then likely to be deducted, ensuring that the vast majority of funds will under-perform. Fund managers earn big salaries and all those television ads cost a few quid - you're paying for them. Besides, managers do a lot of chopping and changing in their portfolios and all those trading costs are a further burden. With an index fund, on the other hand, costs are minimised.
  • My adviser in the bank says that he can sell me a managed fund that has produced great returns over the past few years. Big deal. That cliche about past performance being no guide to future returns has more than a little merit, you know. Studies Have shown that managers who out-perform over a given period tend to give up their outsized gains soon after.
  • But my adviser also said that...
    Listen, it's the height of naivety to think you'll get good and honest advice from some bank rep on commission. Those guys are salesmen, nothing more.
  • So I shouldn't be looking at sexy sales talk or past returns. Picking the few funds that will out-perform in the next few years is guesswork so I'm better off just focusing on keeping my costs down?
    Exactly.
  • How much do index funds usually charge?
    Around 1% per annum, maybe more.
  • Is that cheap?
    By international standards, it's very expensive. In the US, you can buy index funds for as little as 0.1%. Unfortunately, that's Ireland for you.
  • Well, who should I opt for?
    QUINN-life offer a range of index funds that track the Irish, UK, European, US and other international markets. There are no entry or exit fees, you can make a lump sum investment or opt for monthly deposits that start from 51. Annual charges range from 1-1.5%.
  • What are the best markets to opt for? Whats likely to go up?
    Search me. No-one knows that. You should, however, opt for a range of funds and spread the risk. Putting all of your money into, say, the Irish market would be very risky and volatile. Putting all of your money into Latin American or Chinese funds would be riskier again. European, US and UK funds tend to be regarded as 'safer'. Whatever you do, don't put all your eggs in one basket (pardon the cliche).
  • What kind of time frame should I be looking at?
    Preferably ten years or more. If you're looking at a time frame of a year or two, look elsewhere. Markets tend to rise over time but not all the time. The Irish market lost over 25% last year, for example. Is the market guaranteed to rise over a ten-year period? The odds are very much on your side but there are no guarantees in the markets. US markets are currently not far above where they were in 2000.
  • All this talk of volatility and losses makes me nervous. I think I'll opt for one of those tracker bonds that offer money back guarantees along with the promise of stock market growth.
    Don't waste your time or money, they're a joke. Eddie Hobbs describes them as "sexed-up deposit accounts" and "mutton dressed up as lamb". He's being polite. Steer clear.
  • I'm not sure if I have the stomach for investing.
    It's often said that the investor's worst enemy is himself, not the market. People get delirious with excitement when the market is rising and apocalyptic and doom-laden when it's falling. As a result, they buy at the top and sell at the bottom. If you're investing in an index for the long term, you've got to ignore the talking heads on television and sit tight. If you can't do that, then market investment is not for you.
  • I don't know, it sounds a bit lazy, I think I'll keep a close eye on my funds.
    Studies have shown that poorer returns ensue when investors check their holdings regularly. The more they check, the more Nervy they get, causing them to sell at inopportune times or to avoid additional purchases. Have a little faith. Chill out.

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