In most cases, the first-time investors are young executives and college students
who wish to make as much profits as possible from their often limited amount of money.
Many in this age group hope that current investments will form a very strong foundation
for their portfolios in the future. But in reality, it is very difficult for this
group of people to build a diversified portfolio of directly-owned securities or
investments with a small initial capital base.
For illustration, take a look at the case of Mr. Boon, a young executive who hopes
to tap the ever-growing investment opportunities.
Mr. Boon, a single young man, is an executive working in a computer firm earning
approximately RM 2,300 per month and wishes to build his own investment portfolio.
After deducting the monthly expenses of RM 1,500, he has a net monthly income of
RM 800. With a personal savings of RM800 per month, how can he possibly construct
a diversified portfolio of directly-owned securities?
With little investment knowledge and relatively low capital power, Mr. Boon would
be investing through a unit trust as an initial solution. A good suggestion would
be to invest in "aggressive" growth trusts which are normally equity-driven,
managed by professionals to generate superior returns (which normally implies higher
risks).
As an inexperienced investor with small capital base, Mr. Boon is unlikely to
"gamble" by investing directly in highly speculative issues on the Second
Board in order to make a fortune in a very short time (contra period). Although the
returns are attractive, smaller stocks on the Second Board carry extremely high risks.
Normandy has always stressed that one should only invest in speculative issues like
those on the Second Board only if he or she has spare cash.
Growth trusts concentrate on buying shares with potential for strong earnings
growth and in turn aggressive capital appreciation. These trusts normally perform
well in a rising market. In this case, capital appreciation, and not income growth,
should be the priority for Mr. Boon although it would involve higher risks.
If Mr. Boon is the conservative type and is worried if a unit trust which concentrates
only on small selection stocks is much too risky for him, then he should select a
fund that includes a sizable holding of large, medium and small companies, hence,
less risk.
Normandy feels that it is reasonable for first-timers with little family commitment
like Mr. Boon to take on a higher level of risk. Low risk investment menu which provides
low and stable return such as the fixed-deposits and bonds should be left out at
the initial stage of his portfolio development. In addition, it is not productive
for him to hold a large sums of cash. Mr. Boon is also likely to rule out property
and foreign investments at this stage due to his limited capital base.
At year end where he receives his bonus, he could add another unit trust into
his "pocket". Managers with different styles perform differently under
the same market cycle. By buying a few more rather than investing heavily in one
unit trust, Mr. Boon can effectively reduce unforeseen market volatility associated
with his investments. Historical records have shown when investment styles are mismatched,
volatilities are reduced. In addition, young investors without any need for immediate
income should reinvest dividends when available.
As agreed by most financial experts, it is important for first-timers as well
as experienced investors to spread their investment risk. Do not simply put all the
eggs in one basket. Lastly, investors should seek professional advice for better
investment planning.
