BT: Time to take stock (12 Mar 2007)

Time to take stock

HERMAN PHUA lists eight basic rules that can help you safeguard your stockmarket investments

BY almost any measure, 2006 was a rewarding year for investors in Singapore's stock market. After slumping briefly in May, the stock market staged a recovery in the second half to drive the Straits Times Index to a record level, chalking a healthy year-on-year increase of almost 28 per cent for 2006.

More significantly and surprisingly, the market's climb has continued for four straight years - a first in 25 years.

It may be worthwhile now to review your investment goals, reassess the risks and merits of your portfolio and re-evaluate your investment strategy for 2007. Here are eight simple investing rules which may prove helpful.

Rule 1 - It's all about money management.

The first and most important lesson is to understand that there are many different kinds of risks with every investment. To invest successfully, you have to respect and continually manage risk. As far as possible, avoid investing with borrowed money and never place all your bets on one investment. Remember that markets usually crash when you least expect them to. The aim is to make sure you are able to stay in the game for the long term.

Rule 2 - Be diligent and do your homework.

Many people still buy stocks they do not have a clue about. This is plain laziness as doing basic research on a company has never been easier with the amount of information readily available on the Internet. Don't place your hard-earned money on another person's word. Remember the loss will be yours and not his.

Rule 3 - Explain each investment.

There are loads of good, well-run companies but not all of them will be good investments. Make sure you have solid reasons for buying a stock and look to invest for the long term.

Rule 4 - Diversify wisely.

Construct your stock portfolio to include companies from various industries to diversify your risks. At the same time, control the number of stocks you own to keep your portfolio from becoming unmanageable. You shouldn't buy everything you like, only what you like most.

Rule 5 - Resist the urge to trade.

There is a certain thrill to trading in and out of the market. But great stock finds don't come along every day. More often than not, overtrading becomes a habit that will see you struggling to get out of stocks bought on a whim. Even worse, you will probably end up tying up funds on losers and potentially missing out on winners.

Rule 6 - Emotions and investments don't mix well.

One common pitfall is to let emotions influence investing decisions. While greed and fear are well-known culprits of investment loss, this can happen too if you allow yourself to fall in love with a stock and refuse to sell it.

Rule 7 - Learn to cut the losers early.

We often see investors, even the professionals, taking profits on their winning stocks too quickly while doggedly holding on to their losers. If you don't have any compelling reasons for keeping a bad stock, hope alone is not going to stop it from sinking further into the red.

Rule 8 - Prepare a defence plan.

During a prolonged bull market, everyone makes money so long as he has the ability to hold on to his stocks. It is therefore easy to forget that the market will ultimately correct or turn bearish. When that time comes, it is always useful to have a plan. For example, draw up a list of the stocks in which you have greatest confidence. Keep these and sell the rest so that you have cash to re-invest at better prices.

While we could easily double the above list, following these eight basic rules should help safeguard your investments.

Herman Phua is the managing consultant of Octant Consulting, a firm that specialises in providing investor relations advisory services to companies listed on the SGX. This article first appeared in the February 2007 issue of the SGX financial magazine, Pulses. For more information, please visit www.sgx.com

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