Stocks are something of a financial frontier to many people. While they may boldly go into investments in a mutual fund, bonds or take out an annuity, many people are hesitant with equities, largely because these are seen as the territory for wealthier, more 'sophisticated' investors. But they may be denying themselves the opportunity, not only to increase their wealth, but to bulk up their retirement nest egg.
Brent Salvary, fund manager at KSBM Asset Management Limited, said stocks should be the bedrock of any investment portfolio.
"Historically, stocks have been one of the best performing asset classes that you can find," he said.
So, what are stocks?
"Stocks represent ownership in companies," said Salvary. "When you buy a stock, you are a part owner of a company and you partake in the profits of that company."
Some of the profits of the company are paid out as dividends. All things being equal, if the company continues to do well over a period of time, then the value of its stock should also rise.
"It is one of the purest ways to hedge against inflation," said Salvary. "Inflation is produced when companies raise prices on the goods that they sell. Why not own those companies and benefit from increasing revenues and sales based on these prices and these volumes?"
Are stocks that risky?
But isn't investing in equity really risky, a potential investor might ask.
Salvary agreed that there is a component of risk when investing in equity, but said that risk was present in any investment.
"You may get an expensive education but not get a job paying a salary commensurate with your education. You may invest in your own business. You may also invest in real estate. But most people don't see this as being inherently risky," said Salvary. "You see stocks as risks because you see the price changing everyday. On the real estate market, you don't see real estate market prices and the volatility in that market. But house prices fluctuate greatly too. You don't have that fear about the value of the volatility of your home. But that's because you don't see it changing when you are reading the papers everyday. But it exists. People view holding stocks as being risky, but I don't think there is an asset class that has performed as consistently through the years as a well diversified stock portfolio."
Using stock to prepare for retirement
The Sunday BG asked Salvary for some tips on how to go about preparing for retirement using equity as part of an investment portfolio. He advises starting young.
"When you are young, the last thing on your mind is saving for the future. You just finished university. You just got a job. You have money for the first time. The wise among us will start putting away something for the future," said Salvary.
The fund manager said younger people can start with what would be considered safer instruments, such as mutual funds and annuities and build stock into their portfolios as their risk tolerance grows. As a younger investor, Salvary said, investments have more time to grow.
"The earlier you start, the greater the probability that you will end up with something really significant once you keep that discipline and don't keep pulling from it for consumption purposes. That delayed consumption attitude is something that we should develop more of in this country."
Younger people also have time to recover from periods when stocks they have invested in aren't doing well.
"You have a longer time horizon under which you can recover losses if any over time and you can match that volatility by lengthening your investment period," said the fund manager.
As you age, your portfolio will have to rebalanced as you approach retirement. A general rule of thumb to determine the amount of stock you should have in your portfolio, said Salvary, is to subtract your age from 100.
"If you are 20, you should have 80 per cent of your portfolio in stocks. When you are 50, you should 50 per cent in stocks. When you are 70, you should have 30 per cent in stocks. The rule holds them in good stead too because it reduces the risk profile automatically as you age," he said.
Trading and trends in local stock
Currently, it is a legal requirement that stock purchases be made through a brokerage house.
The Sunday BG asked Salvary if trading bots are likely to be used in the local stock market. He said while that was more easily accomplished in foreign markets, he didn't see this happening anytime soon here.
"There is no facility where you can actually go and trade online on the local exchange. I know they wanted to open it up not only to people who own seats on the exchange but if I am not mistaken they want $3 million for that. We don't have that facility here. We don't have the technology available."
The local stock market also hasn't been performing as well as it had been in the past.
"Trading on the local market is going to be tough because we have a very illiquid market and it is getting more illiquid by the day. For the first six months of 2015, stock volumes to mid year were 25 per cent less than the same period last year and it is a clear trend. Activity is declining." said Salvary, "Interest is shifting to overseas assets. You are not getting the interest you would have gotten before."
Salvary said purchases of stock in foreign companies can be made without a broker. However, he noted that in the past foreign brokerage houses have closed accounts of T&T citizens, largely because of T&T's presence on the Financial Action Task Force's grey list in 2012.