Investment of savings in productive financial instruments is spinal cord of wealth creation
Sajjad Bazaz
In the current times acquiring money management skills are inevitable. Majority of us as children were either never really taught how to manage money, or maybe we simply avoided thinking about it because the situation was so dire. But today the dire need is to get acquainted with the financial matters and have a greater awareness of money to be fiscally fit.
When I say awareness about money matters, it does not only mean saving money. Though, to save is the foundation of wealth creation, it’s the investment of the saved amount in appropriate financial instruments which makes your money talk. Investment is all about deferring your present consumption for future goals with expectation of security of amount and getting returns. Basically, it’s the investment which forms the spinal cord of wealth creation. In other words, it’s through investment mode where you can get your money to work for you.
However, taking the investment route is not risk-free and there are a number of risks in investing. There are certain vulnerabilities which result in the dip of expected returns. Sometimes the vulnerabilities even cause loss of capital investment. This is the situation which we frequently witness in the equity market.
While speaking in the context of local investment matters, we have been observing that the equity (Share) market is the most preferred route of investment and the appetite of the local investors is only growing despite innumerable examples where an investor has lost his wealth. The reason was simple – the investor didn’t take pre-emptive measures to mitigate risks associated with investment in the equity market and most of them didn’t bother to know the market dynamics. During the pandemic, when economic uncertainty had sent shivers down the spine of even financially strong individuals, more and more local investors took the share market route to invest for their better financial future.
So, in the context of the growing appetite of local investors, who are mostly naive, towards the share market, it makes sense to discuss certain areas which are most talked about in the investment matters. In fact, many readers have been continuously posting a variety of queries in this regard.
How to mitigate risk while investing in the equity market?
Risk management is one of the keys to successful investing. To mitigate the investment risks, an investor should normally park his money in different sectors. What I am talking about is investment portfolio diversification. Technically speaking, investment portfolio diversification is an investment strategy combining a variety of assets to reduce the overall risk of an investment portfolio.
What are these portfolio risks?
There are risks associated with market returns and in investment matters it’s called systematic risk. Interest rates, inflation, recession etc. are the factors which trigger this kind of risk. Then there is unsystematic risk, which is company specific and this kind of risk can be nearly diversified away.
By distributing your money among a variety of investments that may rise and fall at different times, you will insulate yourself against those big “hits” that your entire portfolio could suffer when one asset class is hit hard. Here it’s important to review your investment portfolio occasionally to check whether the percentages of your shareholdings still fit your risk tolerance and time limit.
So, always consider diversification, invest in quality shares and maintain a long-term perspective. If one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the overall losses of your investment portfolio. Market experts have also endorsed the strategy that by diversifying your investments, you can achieve smoother, more consistent investment returns over the medium to longer term.
Does that mean one should stay away from emerging markets?
Even as Investing in emerging markets is highly risky, that doesn’t mean you should stay away from emerging markets. However, it’s important to first understand the investment outlook, seek the opinion of a financial consultant and then take a decision to add volatile investments to your portfolio. Almost every market expert advises not to follow predictions. No one can predict with any accuracy what future years will bring to the financial markets.
What about the role of stock market analysts?
See, analysts hold a key position in the stock market. They are the players who drive investors’ sentiments in a particular direction. They do this by attempting to determine the future activity of an investment instrument, sector or market. Precisely, they engage themselves in fundamental and technical analysis of stocks and sell their analysis to investors and traders to gain an edge in the markets. Precisely, a stock market analyst is an expert who predicts market trends and accordingly makes his recommendations to the investors and traders.
These analysts have their own categories. We have ‘sell-side’ analysts typically working for prominent brokerage firms and also provide investment banking services for corporate clients-including companies whose stocks and securities the analysts cover. Buy-side analysts form another category working for mutual funds, hedge funds, or investment advisers-that purchase securities for their own accounts. Then there are independent analysts who often sell their research reports on a subscription basis. They market themselves as more independent, emphasizing their lack of conflicts of interest.
We see these analysts making use of the most common terms – buy, strong buy, near-term or long-term accumulate, near-term or long-term over-perform or under-perform, neutral, hold – while pushing their recommendations.
How much an investor should bank upon the recommendation of these analysts?
Of course, analysts in today’s markets are key to important sources of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover-either directly or indirectly. So what matters is the investor’s own application of mind while playing in the markets. You as an investor should not exclusively rely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase. Don’t overstep your financial circumstances while making a decision to buy stocks.
However , even as an analyst may have a conflict of interest, it does not mean that his recommendation is always faulty. It’s up to you as an investor to assess whether the recommendation is wise for you. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity.
In succinct, treat an analyst’s report as part of a bigger picture. Of course, do not make it the sole basis for your investment decision.
There are investors who bank upon soothsayers while taking a dip in the equity market. How far are these soothsayers dependable?
It’s a long-established fact that human beings have always shown keen interest to know their future. This keenness to get a glimpse of their future led to the science of fortune telling and this way soothsayers, also called voodoo scientists, emerged on the scene. It’s interesting to note that in the world of financial markets, these professional soothsayers make hay while a huge number of investors – be it individuals, groups, companies or corporates, bank upon their advice more particularly for investment in stock markets.
These soothsayers dish out their predictions on birth charts and correlations between stock prices and planetary movements, combination of numerology, tarot cards and horoscopes among other things.
Here I am reminded of the technical analysis tools known as Gann angles. William Delbert Gann is founder of this technique and is supposed to have used astrology to forecast stock prices as far back as in the 1920s. Gann angles are widely used by traders even today. Today we have a huge network of astro economists who assemble at the World Conference of Astro Economics since 1988 to discuss the impact of star alignments on stock markets and the economy.
NOTE: The article contains extracts from forthcoming book – Straight Talk: Contemporary Banking Decoded.
(He is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank)
