If you read my blog on being an the accidental shareholder published a few years ago you will know how I feel about holding individual stocks. They can be more trouble than they’re worth; annual tax returns, stockbroking fees, bid-offer spreads and so forth (but then again, maybe I’m the only one that runs a mile from hassle!)
There are two critical questions you need to ask yourself when considering stocks and shares as part of the solution to a comfortable life.
But first, let me ask you this – if you ended up buying shares, did you read the prospectus by any chance?
AIB back in the news
There was extensive media coverage of the AIB IPO back in 2017 and depending on what you heard or read you could be persuaded that buying AIB shares was a very good idea or a bad one.
Michael Murray, writing in the Sunday Business Post at the time of the IPO noted that 39 pages of 687-page prospectus dealt with risk and the remaining pages gave a deep insight into the bank’s assets.
This seems like a refreshing change – many prospectuses keep the risk section as brief and vague as possible.
So that brings me to my first question:
1. Can you afford to lose the sum you’re investing?
With the collapse of Enron, Anglo Irish Bank and many others, shares should never have been or should be considered low-risk.
Bank shares or not, you have to view any investment in terms of whether or not you can afford to lose it all, and what the likelihood of that is at any point in time.
So, depending on where you are in life, how much can you afford to lose?
What would losing that money mean to your retirement plans? Your children’s education? Your business? Your legacy?
If you have your pension boxed off – and your spouse’s – a ring-fenced children’s education fund, a contingency fund, adequate life assurance and income protection, no property-related debts or other liabilities, then yes, you may be able to take the risk of investing a substantial sum in one company.
But why would you do that?
Here’s my second question (also about risk):
2. How much of your net worth are you tying up in one asset class, let alone one stock?
Too much property, too many savings, too much in equities – none of these is a desirable scenario.
Then within an asset class, you can be over exposed.
If you only hold shares in one company – AIB for example – and there is the risk of institutional failure, and it would not take a huge stretch of imagination in our post-banking-crash world, to see it happen.
Remember what happened to eircom – its majority shareholders stripped it of any valuable assets it had and left it for dead. Retail shareholders like you were powerless to stop it. I am not trying to belittle you as an investor, but unfortunately the category of ‘retail investor’ is bottom of the pile.
Consider the following
Your portfolio is spread across the main asset classes of real estate, equities, and fixed income. You have cash on hand for the more immediate chunky expenses – private school fees, changing the car or so forth. You are largely immune from temporary stock market crashes. Your portfolio is globally diversified.
Most importantly, you have an investment strategy that reflects your and your family’s future anticipated objectives and you are not relying on the whims of a stockbroker gazing into their crystal balls.
Maybe it’s time to sell your stock portfolio. Consult with me first.