TC BUSINESS
Risk and
return
 |
Illustration by
Yukiko Leitch |
|
The recent turmoil
in the international financial markets serves to remind us only too well that although
investing in the markets proves over the long term to provide a better return on your
money than bank deposits, achieving the better returns provided by the stock market cannot
be done without some risk to the capital invested. As individual investors we need to
understand the risks involved in selecting the right investments, and choosing the right
time to invest.
It is important not to put all your eggs in one basket. With stock market investments,
there is real danger in investing in one, or just a few companies' shares. If you buy
shares in two companies and one of them goes broke, the value of the investment is halved
in one stroke. For the wealthier investor, it is possible to create a diversified
portfolio consisting of a wide number of shares, in a wide range of sectors. For most of
us, however, the most viable alternative is to invest in a unit trust or mutual fund. In
such cases, your money is pooled with that of other individuals and a fund manager invests
in numerous different companies in a variety of markets, so that if one of them were to go
broke, the overall effect on the value of the fund would be massively reduced. Standard
& Poors Micropal (www.micropal.com) has a useful information service on the Web that
lists thousands of funds and their performance ratings in various sectors over time.
The general long-term trend in stocks is an upward one; however, there are times when the
markets will fall, sometimes heavily. This risk can be very much reduced by increasing the
amount of time one leaves the money invested. You will not physically make a loss unless
the investments are sold. By holding onto investments instead, history has shown that the
market will tend to make up for that loss and much more over a period of time.
It is important not to commit capital that is likely to be needed on short notice. The
best place for this money is in a bank account on term deposit, or in a money market fund.
When one does invest, it is best to do so with a view to holding the investment for a
minimum of three to five years and, should the timing of the investment prove unfortunate,
be prepared to hold for a longer period of time. When deciding for which long-term need
one will be investing, sitting down for half an hour and drawing a financial time line can
be an invaluable exercise for discovering when the money will most likely be needed. Of
course, once long-term goals have been set, stick to them!
James Murray is a consultant at Stirling Macguire Asset Management
(Japan) Ltd.
Where in the world...
Where should you be
investing nowadays? The current combined market capitalization of three US companies -
General Electric, Microsoft and Coca-Cola - is larger than the total market capitalization
of the whole of Asia, excluding Japan.
The market capitalization of the 15 biggest US companies is greater than that of all of
Asia; that's equal to Japan, Taiwan, Hong Kong, Singapore, India, Malaysia, Korea,
Philippines, Thailand, Indonesia, Pakistan, China, and Sri Lanka.
US companies have been enjoying high levels of profitability that cannot continue. The
average return on equity of 24-25 percent is almost double the US historic average and
results from a number of specialist factors that will not be repeated in coming years.
America is finally feeling the effects of the crises in global markets. Corporate earnings
are slowing and fundamentals are being focused on. One simple measure is a relationship
called "price to book" (P/B) with the US market trading at an average P/B well
above 5. To put that in context, the Japanese market traded at a P/B of just under 5 at
its peak in 1989. And we called that a "bubble economy".
In short, the US company has become far too expensive.
Templeton has been reducing its weighting in the US for the last two years and continues
to invest heavily in Continental Europe, Asia (taking a long-term view), Latin America
and, increasingly, Japan. This is where we see value for the immediate future.
It's time to take the profits you've made in the US market and diversify around the world
to increase your potential return.
Courtesy of Templeton, part of Franklin Resources, Inc. in association
with Stirling Macguire Asset Management Ltd. |
