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STICKING YOUR TOE INTO THE MARKET
You have LE 10,000 to invest and want to invest it in the stock market, but don’t feel comfortable with your limited knowledge of capital markets. Here are some options for the novice investor.
BY LOUIS WASSER
Keeping your money under your mattress might seem like a bright idea, but not only will the lumps keep you tossing and turning all night long, so will thoughts of inflation whittling away your nest egg’s value.
With double-digit inflation over this past year, those with extra cash would do better to invest their hard-earned savings. Not only will this help dampen the effects of inflation on your net worth, it could, if all goes well, make a healthy profit in the process.
Sure the safe route would be to invest your money in a bank or term deposit. But you’ve been captivated by the stock market’s stellar performance in recent years and you want to do more than simply play catch-up with inflation. The CASE 30, the benchmark index of the Cairo & Alexandria Stock Exchanges (CASE), has risen over 700 percent in the past four years. Somebody’s making a lot of money out there. Why shouldn’t it be you?
As an inexperienced investor you don’t feel comfortable jumping straight into the market with a large amount of cash. Instead, you prefer to invest a small amount during your first forays into the market to limit your exposure while you gain experience and confidence. So you decide to start with LE 10,000. But you have two problems; first, you don’t have a clue about the market, and second, it’s hard to find a securities brokerage willing to accept you as a client. Most brokerages require much larger sums for consideration, and the larger firms require upwards of LE 1 million to become a client.
Rest assured, there are a number of good options for a small investor, especially if you’re someone who would rather let the pros manage your money. Definitely worth considering are mutual funds, which are investment pools managed by professionals who use the collective investments of the fund to buy and sell securities, passing along the profits to investors.
A number of different kinds of mutual funds are available in Egypt, varying in levels of risk and return. Equity funds, which invest in stocks, are the riskiest variety, although their returns tend to be higher than the others. At the other end of the risk scale are fixed-income funds, which trade in both corporate and government debt and aim to provide their investors with a steady income. Balanced funds, as their name implies, balance their investments in equities and fixed-income investments. While less risky than equity funds, they have a higher potential return than fixed-income funds.
Mutual funds tend to have diversified portfolios, spreading out investment risk in a number of different securities. In a sense, investing in a mutual fund is like tying yourself to an index, although the fund’s professional managers are able to take defensive positions if they anticipate a downturn in the market. In choosing which mutual fund to invest in, there are a number of established funds with proven track records of gains, some with returns in excess of 50 percent over the past year. Of course, success in the past does not guarantee more of the same in the future – there’s no such thing as a sure thing in investing.
To make your decision easier, the Egyptian Investment Management Association (EIMA), an association of investment and asset management firms, provides performance reports on the various Egyptian mutual funds. Their website (www.eima.org.eg) is often out of date, but you can subscribe to receive their regular weekly newsletter. You can also check with the various fund managers for information on the performance of their mutual funds.
To invest in mutual funds, you usually apply at the sponsor bank, rather than the fund manager’s office. Minimums vary according to the fund, but there are a number of funds that are open to small investors with less than LE 10,000 to invest.
If you’re looking to enter the market for far less, there is another option that let’s you invest as little as LE 100 – and with professional asset management to boot. Egypt Post now offers an investment account that is managed by the experts at big investment firms such as EFG-Hermes and HC Securities. To open one of these accounts, visit one of Egypt Post’s 3,400 branches nationwide. Once invested, you have a window every Saturday to pull out your capital, if you desire. For the pious-minded investor, Egypt Post also offers the Faisal Islamic Bank of Egypt Islamic Investment Account, a Sharia-compliant fund with a minimum investment of LE 10.
Exchange traded funds (ETFs) combine many of the advantages of investing in a mutual fund and buying and selling stocks through a securities brokerage. ETFs are traded like stocks, but they function similarly to mutual funds, buying securities broadly to attempt to match the performance of a particular index or sector. While not yet available in Egypt, these index funds are expected to make their debut soon.
When they do, investors will be able to buy ETFs through a securities brokerage as they would a stock, and with no minimum for investment. While there are management fees, these are typically lower than those of mutual funds.
The performance of ETFs is tied to the index with which they are associated, which means you will have to make defensive decisions if you anticipate a downturn in the market. If the index dips, it is likely that the ETF will as well. Because of this, investment advisers say it’s smarter to get involved in exchange-traded funds after a strong correction in the market, such as the one that occurred in May 2006. A savvy, patient investor might be wise to wait for a repeat of this kind of dip before sinking a lot of capital into this kind of investment.
As it stands now, you might feel like your un-invested money is going to waste, but you’ll certainly feel much worse if you make a rash decision that costs you heavily. So you should take your time to seriously contemplate which option is best for you. Hopefully, once you’ve made your choice, the lumps in the mattress will be gone and you can get back to having a good night’s sleep knowing you’ve made an investment in your future.
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MANAGING YOUR OWN STOCKS
If you want to be directly involved in making your investment decisions, a securities brokerage might just be your thing. Securities brokerages allow you to buy and sell stocks on the bourse at your own discretion, offering services that include online trading, the ability to speak to a broker, and research to help you make informed investment decisions.
In your search for a brokerage you will have to bear in mind that fees for using a securities brokerage vary widely and some brokerages require a fairly steep minimum investment to become a client. A smaller brokerage with low fees and minimums may be more suitable for investors who don’t mind doing all the research themselves. But there is also a good case for paying extra to have professional advice and investor services.
Once you’ve chosen a brokerage, the next step is creating a portfolio. In doing so, it is important to remember that a diversified portfolio decreases your investment risk. And unless you’re willing to sink a lot into the market, it’s hard to create a diversified portfolio of large-cap stocks, the share prices of which may by over LE 500 per share. Investing in low-cap stocks allows you to take a little money a long way, although many so-called penny stocks have no research coverage.
Finally, you may be tempted to join the growing number of Egyptians using online trading. Should you decide to go this route, bear in mind that while e-trading might make stock transactions easier and more convenient, it will not drastically cut the amount of time you need to spend making and executing your investment decisions. Selecting a diversified portfolio with solid fundamentals can be a time-consuming, arduous process.
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