3 Steps to Investment Success: How to Obtain the Returns, While Controlling Risk

The aim of this book is to demonstrate that becoming a successful do-it-yourself (DIY) investor is within the reach of almost every person in society. Saving or investing in the stock markets is for everyone – from parents with the children’s allowance, to someone who has a lump sum to invest, to the person who has just started working but can save even €100 a month, to someone who is free to manage their own pension. Building an asset base from which you can earn income gives you choices later in life. The aim is that, when you close this book, you should be able to implement an easy-to-follow approach to investing in the stock markets, whilst minimising risk.
 
No matter what level of experience you are starting from, this book is aimed at assisting you to obtain the returns on offer from the markets over time. Arming yourself with a proper strategy or plan, which dictates what you buy and when you sell, is the key to stock market investing, and developing one is a good deal easier than you may think. That plan might be simply to invest across the different asset classes where there appears to be clear value on offer; to concentrate on high yielding funds listed on stock markets as a method of generating income, while controlling risk; or to master some successful approach to stock selection.
 
3 STEPS TO INVESTMENT SUCCESS offers an easy-to-follow mechanical approach to selecting a diversified portfolio of stocks from the UK FTSE 100 Index, an index that represents the 100 largest companies listed on the London Stock Exchange by market capitalisation. You will learn also how to invest in the stock market indirectly through listed funds, such as exchange-traded funds and investment companies, which offer instant diversification, allowing you to more easily control risk.
 
And 3 STEPS TO INVESTMENT SUCCESS includes a short story, A Villa in the Sun by Virginia Gilbert, a BAFTA-nominated, award-winning writer and director, to drive home the often real consequences of speculating in markets rather than investing.

Contents

Disclaimer

Acknowledgements

INTRODUCTION

Approaches to Investing in the Stock Market

Debunking Some Myths

Common Investing Errors

3 Steps to Successful Stock Market Investing

The Structure of the Book

SECTION I: SOME FUNDAMENTALS OF INVESTING

1: PERSONAL FINANCIAL AND INVESTMENT PLANNING

Paying Down Your Mortgage Makes Good Investment Sense

Risk Assets vs Non-risk Assets

2: COMMON INVESTING ERRORS

Inappropriate Use of Debt

A Lack of Diversification in Risk Assets

Speculating Rather than Investing

Obtaining Poor Value

Mistaking a Temporary Loss for a Permanent Loss

A Haphazard Approach to Investing in Individual Stocks

3: WHY MARKETS SHOULD RISE OVER TIME

Returns from Risk Assets must be Higher than Bank

Deposits

Businesses First, then Property

Stock Market Indices

4: THE POWER OF COMPOUNDING

The Rate of Return Matters

But Time is Also a Powerful Force in Compounding

5: DEFINING THE LONG-TERM

The Lump-Sum Investor

The Regular Investor

6: UNDERSTANDING STOCK MARKET VOLATILITY

Understanding the Markets

Volatility is Not the Same as Risk

Economic Expansion and Contraction

Corporate Earnings Are Volatile

The Markets are Emotional and Liquid

7: STOCK MARKET AND DIRECT PROPERTY INVESTING: COMPARISONS AND CONTRASTS

The Comparisons

The Contrasts

8: THE PITFALLS IN DIRECT STOCK PICKING

Risk

Coca Cola: Case Study

SECTION II: A TOUR OF THE ASSET CLASSES

9: INVESTMENT CHOICES AND RETURNS

Introduction

Risk Assets and Non-risk Assets

Summary Returns from the Various Asset Classes

Bank Deposits

Government and Corporate Bonds

Equities (Shares)

Commercial Property

Commodities and Precious Metals

Precious Metals – Gold

Hedge and Absolute Return Strategies

Alternative Assets – Timberland (Forestry)

Summary Conclusions

Overall Conclusions

10: BANK DEPOSITS

11: GOVERNMENT AND CORPORATE BONDS

No Income from Developed Market Government Bonds

12: EQUITIES (SHARES)

A Valuation Framework for the Key US Equity Market

13: COMMERCIAL PROPERTY

14: COMMODITIES

Can Commodities be Valued?

15: PRECIOUS METALS – GOLD

The Physical Attributes of Gold

Returns from Gold

16: HEDGE AND ABSOLUTE RETURN STRATEGIES

17: ALTERNATIVE ASSETS: TIMBERLAND (FORESTRY)

Final Note

SECTION III: IMPLEMENTING AN INVESTMENT PLAN

18: WAYS OF GAINING EXPOSURE TO THE

MARKETS

Investing through Funds

Exchange-Traded Funds

Do-it-Yourself (DIY) Investing

The Key Characteristics of ETFs

The Key Promoters / Sponsors of ETFs

The Structure of ETFs

Investment Companies (Investment Trusts or Closed-end Funds)

Characteristics

Other Considerations

19: AN INVESTMENT PLAN: GETTING STARTED

Getting Started

Opening a Stockbroking Account – Savings and Pension Monies

Security of Client Assets

Managing Your Own Pension

20: INVESTING ACROSS THE ASSET CLASSES

Build Your Own Fund of Funds … at Minimal Cost

Investing for Income across the Asset Classes

21: ENHANCING RETURNS: VALUE INVESTING IN THE FTSE 100 INDEX

Make the Stocks Identify Themselves

We Are Not Good at Forecasting

Better Just to Select Stocks by Value

Stock Picking in the FTSE 100 Index

The FTSE 100 Low Price-to-earnings Approaches

Compounding in the FTSE 100 Index

Points to Consider

Some Frequent Questions

Implementing the Approaches in Practice

22: TIMING THE MARKETS

Timing the Markets

Technical Indicators

Dow Theory

The 30- & 50-Week Moving Average Indicators

The Coppock Indicator

Capitulation Indicators: Buying Panic also Pays High Returns

23: THE FINANCIAL SERVICES INDUSTRY

The Investment Advisor and the Client are on Opposite Sides

Fund Managers are not the Problem

The System Needs to Change

The Stockbroking Community

24: 3 STEPS TO INVESTMENT SUCCESS

Putting It All Together

Online Dealing and Independent Advice

25: GILLENMARKETS

SECTION IV: A SHORT STORY

About Virginia Gilbert

26: A VILLA IN THE SUN

Comments on ‘A Villa in the Sun’

APPENDICES

1: Stock Market Valuation Terminology

Determining Value

Case study: CRH plc

Summary

2: Guaranteed Structured Products

3: Calculating the 30- & 50-Week Moving Averages

FTSE AllShare Index Spreadsheet Example

4: Creating Your Own Coppock Indicator Template

FTSE AllShare Coppock Spreadsheet Example

5: Recommended Reading

Value Investing

Growth Stock Investing

Trading / Speculating

Technical Analysis

Hedge Fund Industry

Others

Charts

Figures

Tables

Index

About the Author

Rory Gillen attempts to demystify the process of investing in this easy-to-read guide that will appeal to novice investors or those unsure of what to do with spare cash.

He emphasises the value of regular saving, noting the power of compound interest. If you can save a portion of your earnings each month, over time, you will build an asset for yourself with no debt attached. If you can generate a return of 8 per cent a year, that will turn a €250 monthly investment programme into €46,936 after 10 years, while after 20 years you will have €148, 269.

Getting that level of return is the challenge and Gillen provides advice on the type of investments that can generate this. He recommends adopting a tried and tested approach to investing that has at its core an emphasis on value, as he argues that it is value on offer in the asset you buy that largely determines the subsequent returns over the medium to long term.

Don’t let volatility interrupt your plan and realise that you have natural advantages over the institutional (professional) investor and that success accrues to the well-prepared investor but rarely to the speculator who wants only quick results.

Frank Dillon, Booked, The Irish Times

Becoming a successful do-it-yourselfer (DIY) investor is within reach of almost every person in society, argues Chartered Accountant, Rory Gillen, FCA, in this practical and readable guide that explains an easy-to-follow approach to investing in the stock markets aimed at delivering results over time while minimising risk.

3 Steps to Investment Success includes a short story, “A Villa in the Sun”, by Virginia Gilbert, a BAFTA-nominated award-winning writer and director, to drive home the often real consequences of speculating in markets rather than investing.

Accountancy Ireland