Investors of all types - experienced, novice or those just thinking about dipping their toes into the stock market - have no shortage of questions when it comes to knowing how, when or where to start.
In conjunction with the annual Investment Guide, which appears as an insert in Sunday's newspaper, the Tulsa World asked a few of the financial professionals who participated in this year's guide to answer 10 general investing questions.
Area financial professionals give advice on how, when and where to start investing
What are some of the most important
questions to ask a financial
adviser or investment professional
before hiring him or her?
What are your credentials
(should be a certified financial
planner or a chartered financial
consultant)?
How long have you been in the
financial services business? It
is best to have someone with at
least 10 years’ experience. That
way they have lived through both
good and bad markets.
How do you get paid? Ideally,
it is best to work with an advisory
fee person (they receive a
small fee annually).
Ask for the name of 10 of his
or her clients together with their
phone numbers. Call three or
four of them to find out if this
person has continued to give
them advice and service.
—
James K. “Skip” Nichols, Financial Planning Resources Inc.
How many clients do you
work with who are similar to me
and my personal circumstances
or account size?
Can we go through your Form
ADV and brochure disclosure
that you are required to give me
so that I may better understand
you and your firm? If the adviser
doesn’t want to, that is a red flag
to go elsewhere.
Do some investments you
recommend pay you more than
others? If the answer is yes, go
elsewhere.
If I work with you, will I have
a limited number of investment
choices? If so, who decides
which investments are in the
universe of choices? The point
is to understand if the adviser
is recommending only his firm’s
proprietary investments, which
typically are more expensive and
may not be the best investment
option.
Which client standard do
you operate under: the suitability
or fiduciary standard? If
the suitability standard, how do
you manage conflicts of interest
if and when they arise? If the
answer is not the fiduciary standard,
go elsewhere.
—
Dan Safranek, Safranek & Associates
What is the biggest challenge
for smaller investors in the stock
market today?
Goddard
The biggest challenge for all
investors is overcoming their
own emotions.
It’s become
even harder to
remain calm in
recent years because
the financial
crisis was
so traumatic to
people’s lives a
few years ago.
No one wants to endure it again.
—
Keith Goddard, Capital Advisors Inc.
Human behavior tends toward
greed or panic. After a prolonged
period of good returns, many
investors forget about caution
and diversification. They began
looking for those assets that
have had the greatest returns
(greed). An example is all the
money flowing into tech stocks
during the tech bubble in the
late 1990s. When we have a
prolonged period of poor returns,
people begin to panic and sell
great American companies (e.g.
Coca-Cola, Wal-Mart Stores
Inc., General Electric, etc.). Instead
of scooping up these great
companies at bargain prices,
people sell for a loss.
—
James K. “Skip” Nichols,
Financial Planning Resources Inc.
When are the best times to invest
in bonds versus stocks? What
do you see happening with bond
interest rates in the near term?
Bond interest rates will probably
go up over the next several
years. In May, they were at an
all-time low (the 10-year U.S.
Treasury bond). The federal
government has been keeping
interest rates artificially low, and
as the economy improves, those
interest rates will start to go up.
That can be both good and bad.
The good part is you will begin
earning higher rates return on
your bonds that are purchased
in the future. The bad part is that
the current bonds you have will
lose value.
—
James K. “Skip” Nichols,
Financial Planning Resources Inc.
The best time to invest in
bonds is when rates are high
or stable. And interest rates
currently are near all-time lows.
My expectation is that economic
growth is going to continue to
be positive for the next several
years. That being the case,
interest rates should be moving
higher from here. If you are a
current investor in bonds, you
would see gradual erosion in
your principal because of that.
For investors who have money
that is going to be earmarked
for bonds, the higher rate environment
we’ll have over the next
several years will be beneficial
because they will be able to buy
bonds with higher yields.
—
Jim Huntzinger, BOK Financial Corp.
The Federal Reserve is flirting
with tapering off its bond-buying
program, which has boosted the
stock market. What will happen to
the stock market as the Fed does
that?
The Fed has done three
rounds of quantitative easing.
When they withdrew the first
two programs, stocks dropped
and bonds rallied, presumably as
an expression of lower expectations
for economic growth. Neither
market fell apart, however.
My best guess is that traders
will mimic the playbook from the
previous two episodes when the
Fed tapers, but the impact on
financial markets is probably not
worth worrying about.
—
Keith Goddard, Capital Advisors Inc.
There is probably still some
risk that the announcement
regarding the Fed’s tapering their
bond–buying program could
negatively influence the equity
market in the short run. But I
think in the long term we’re all
better off having the Federal
Reserve out of our bond market.
.... I think that it’s better for our
markets when they are more
freely able to trade without the
inclusion of the Federal Reserve
taking so many securities out of
the market.
—
Jim Huntzinger, BOK Financial Corp.
What are the most essential factors
a person should look at when
buying either individual stocks or
mutual funds?
There are many ways to approach
this, but I prefer to look
at the underlying cash flows and
economic profits that a company
is generating. Earnings figures
can be manipulated, so cash flow
tends to be a better reflection of
how a company is truly performing.
Economic profit considers
how a company is reinvesting
the cash it generates through its
operations — does management
choose new projects with returns
that exceed the company’s
cost of capital? If so, they are
creating economic profits and
value for shareholders.
—
Andrew Boyd, Gibraltar Capital Management
When evaluating any equity
investment, whether individual
stock or mutual funds, first
determine why you are investing,
such as current income,
growth for future income source,
or a combination of the two. Secondly,
define the time horizon
of the investment — short,
intermediate or long. The longer
the time horizon, the more aggressive
you can be because you
have more time to recover from
the volatility that is a natural
part of the investment process.
Conversely, if the time horizon
is short to intermediate, a less
aggressive focus on dividends
and balanced funds may be the
appropriate choice.
Be brutally honest up front
about how you’ll react to a 20
percent or 30 percent drop in the
value of investments held because
there will be a day when those
declines will become reality.
—
Brian Smith, CastleRock Financial Advisors,
Collinsville
What exactly is the P/E ratio and
how important is that when deciding
whether to buy a specific stock?
Smith
P/E ratio is a measure of
relative value compared to other
stocks or to the market as a
whole (P: price, E: earnings). If
Company A earns $15 per share,
and is trading for a price of $100,
it has a P/E ratio
of 15. Company
B may have
earnings of $8
per share and is
trading at $100,
for a P/E ratio
of 8. We now
have a measure
of relative value
of Company
A to Company B. ... While an
important component of stock
evaluation, it is only a small part
of the full fundamental research
that needs to be completed prior
to final selection.
—
Brian Smith, CastleRock Financial Advisors
What costs or fees are associated
with buying stocks or selecting
mutual funds?
The commission costs associated
with the purchase for
individual stocks have come
down dramatically over the
last 15 years. So it’s relatively
inexpensive today to purchase
stocks. Mutual funds are priced
in different ways. If you’re receiving
advice to purchase the fund,
then typically it will come with a
“load” — that’s a sales charge or
sales load in order to compensate
the person you’re receiving
the advice from. Or, you can buy
funds that are “no-load funds,”
which do not come with any
sales charge, but you’re doing
the research on your own.
—
Jim Huntzinger, BOK Financial Corp.
Today with the popularity of
401(k)s, employees are more
responsible than ever for deciding
how to invest for retirement,
which can be daunting. How does
one even begin to know what type
of funds to select or investment
strategies to make?
The general rule is for younger
people to invest the majority
of their portfolio in stocks and
gradually transition to bonds as
they get closer to retirement age,
although each individual should
consider their specific circumstances
(age, time horizon, risk
tolerance, return objectives,
etc). Most 401(k) plans offer
Target Retirement Funds, which
are a simple way to maintain a
balanced, diversified portfolio.
These funds allow you to pick a
fund dated around when you expect
to retire. As that target date
approaches, the fund will shift
from a more aggressive (stocks)
to a more conservative (bonds
and cash) position.
—
Andrew Boyd, Gibraltar Capital Management
Investment professionals always
talk about the importance of being
diversified. How does one go
about doing that in today’s volatile
market?
One way of diversifying is to
buy funds rather than individual
securities. If you buy a fund, you’re
diversified across a host of stocks
or bonds. If you buy an individual
security, you’re clearly focused on
just one company or one bond.
—
Jim Huntzinger, BOK Financial Corp.
There are many low-cost ETFs
(exchange traded funds) and
mutual funds that offer investors
access to practically every asset
class in existence — stocks,
bonds, domestic, international,
large cap, small cap, etc. These
investment vehicles provide
a cheap, easy way to build a
diversified portfolio. The exact
makeup of your portfolio should
be based upon your particular
circumstances.
—
Andrew Boyd, Gibraltar Capital Management
What is the most invaluable
investment advice you’ve received
in your lifetime?
Boyd
Know what you own and why
you own it. For an individual
stock, this means having an
understanding of how that company
makes money and creating
a thesis for why you believe it is
a good investment. In the case
of a mutual fund, it is practically
impossible to
be an expert on
every holding
within the
fund. However,
understanding
the strategy
behind the
fund and how
the portfolio
manager makes
investment decisions is important
when selecting a fund that
fits your investment needs.
—
Andrew Boyd, Gibraltar Capital Management
Thoroughly know the investments
you make and understand
concretely how you will make
money. A lot of people get starstruck
by the complexity of an
investment. They tend to equate
complexity with sophistication;
sophistication with expertise;
and expertise with “can’t-losemoney”
attitude. If you can’t
explain what you are investing in
to your mother so that she can
understand it, than you probably
shouldn’t be making the investment.
—
Dan Safranek, Safranek & Associates
Original Print Headline: Money tree
Finance
Porat’s own bank almost vanished when hedge funds, spooked by difficulties getting money out of bankrupt Lehman Brothers, pulled more than $128 billion in two weeks from Morgan Stanley.
When it comes to catastrophes and disasters, anniversaries typically bring up bad memories.
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