Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

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What To Do With Your Money

February 27, 2004

To the layperson saving and investing are financial terms that are interchangeable. However from the perspective of creating and building your personal wealth each of these actions will generate a significantly different financial outcome.

Saving means reducing present consumption, however when you invest you do so in the hope of increasing future consumption. Generally speaking saving refers to storing money in bank or similar financial institution. This gives you immediate access to your funds and is ideal for meeting short term expenses or emergencies.

It may sound odd but if you save all of your surplus income you will either lose outright or gain very little. The reason is that saving generally offers a low fixed rate of return. When this return is adjusted for inflation it becomes even lower. If the rate of inflation is higher than the rate of return on your savings then you actually lose – you have reduced present consumption but also have a reduced hope of future consumption.

To really increase your personal wealth you need to invest. Unlike saving which is passive, investing is an active process and involves taking risk. If you are serious about building your personal wealth then it may be wise to consider moving some of your funds from savings to investments such as stocks. How much of your savings you are prepared to invest and the investments that you choose depends on your tolerance for risk.

Understanding Risk

The return on an investment is the income that you expect to receive on that investment. This return can take the form of recurring revenues (dividends or interest), capital appreciation (rising share prices) or by tax deferral (e.g. annuities). Most investments offer a combination of the above.

The size of the return on an investment is usually directly related to the level of risk involved. Risk is the uncertainty that you will receive an expected return and at the same time preserve your initial capital. Risk is a complex, multidimensional concept so many investors don’t really understand how or where risk manifests itself.

It may sound surreal but in the world of investing risk is omnipresent. Risk can be seen in stock price volatility, stock market crashes, corporate bankruptcies, currency devaluations, changes in sentiment, in inflation, interest rates, the tax code, government fiscal policy even labour issues.

Risk is everywhere and what this means to an individual investor is that because of any number of factors, including but not limited to those detailed above risk is the chance that your actual return will be less than you expected.

In order to achieve a good return on your investment you must assume risk, anyone who says otherwise is probably leading you into a scam. What the sensible investor does is determine what risks they are willing to assume and what they need to avoid. Your ability to handle various risks is closely related to your individual circumstances. These include your age, investment horizon, liquidity needs, income, investment knowledge and attitude towards price fluctuations.

What’s highly risky to one individual may be no problem to another. Short-term fluctuations are not that relevant for long term investors who have the discipline, patience and understanding to deal with them.

Investing versus Trading

Now that you understand risk, you are in a better position to appreciate the difference between investing versus trading. An investor can either be investing or trading. Most people especially those involved in the stock markets tend to think of themselves as investing by default. However the answer really lies in what you do with your money.

As opposed to saving, both investors and traders are trying to put their money to work in an active manner. However the act of investing has all the connotations in keeping with a longer term horizon and therein lies the simple yet fundamental difference between the two. Out of this difference in philosophy comes an appreciation that they both have accepted differing types and levels of risk.

Someone who is investing understands that there are overall risks involved in acquiring assets such as stocks and then takes some actions to try to diminish these risks. He sets specific goals and has reasonable expectations further he knows what his risk tolerance is. He does his homework and knows why he is making a specific commitment. He measures his success by meeting his goals, not by what some index does or by what a friend does. Investing requires long term discipline and sticking to goals.

If you are trading you have assumed a short time horizon. You are prepared to take larger risks and are want to overlook or even ignore risk diminishing strategies. As a trader your primary focus is to “make a fast million”. Most traders do very little homework and lack discipline instead they display lots of bravado. A trader might invest in just one stock or in one industry, they may try to time the market changing their entire portfolio in an instant. All of this is often done on a hunch.

Now that you know the difference where do you think you fit in?

One can argue that quite a lot of the investments in the Trinidad and Tobago Stock Market done by individuals are carried out from the perspective of trading rather than investing. Everyone seems to be on the lookout for the latest tip, decisions to buy or sell stocks are often made at the golf course, the after work lime or the office coffee table. When someone picks a winner they boast about it and when they end up with a “dead stock” – well that becomes the long term investment in their portfolio.

Mixture of Both

Make sure you are clear that there is nothing wrong with trading, especially if there is money to be made. However as with everything else in life there needs to be a balance and this is where money management is important. You can invest and you can trade, just never mix the two.

Have two separate portfolios and if you are investing then think long term and manage your risks, when you are trading use only your trading portfolio and ensure that you understand clearly that this is what you are doing.

In the end it all comes back to risk. Set aside a portion of your surplus income for investing and a portion for trading. How much you put into the respective portfolios depends on your attitude to risk. If you try your hand at trading and you are successful then its all to your benefit, but at least you did not put your entire portfolio at risk so that if you were to lose then you would have controlled your losses.

emember too that your risk tolerance is always changing, the markets are also changing and you must adjust your actions in order to meet these changes. If you lack the time or the expertise then let your stockbroker meet you half way. Develop a clear understanding of your investment needs and your tolerance to risk and then consult with your broker on the state of the market.

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