FOR a very brief period this reporter tried online day trading, and I can tell you now that it was not one of my greatest ideas.

Heart racing, sweat beading on my forehead, I stared desperately at the computer screen hoping that I had made a good buy (or sale) with each trade.

Those days are long past, but, with a lot more training I might possibly have made a better run of it. However, the underlying issue wasn’t how much knowledge and skill I had, but rather the amount of risk I was willing to take — I am a low-risk investor.

Before deciding how to invest your money, you need to determine what kind of investor you are. After that, working out your investment portfolio will become much easier.

Equities (shares in companies) involve the highest level of risk among four major asset classes. The others are cash, bonds and real estate, according to Roy Reid, the manager of client portfolios and investment strategies at Jamaica Money Market Brokers.

He believes that the lower your willingness and ability to take on risk, the smaller your exposure to equities should be. High risk usually means high returns, but stock prices don’t always go up.

Most investors who buy shares in companies tend to have a medium to high level of tolerance for risk, according to Tania Waldron-Gooden, vice-president, research and special projects at Mayberry Investments Limited, but that doesn’t mean that there aren’t also opportunities in equities for low-risk investors.

Risk-averse investors could target blue chip, dividend-paying stocks, or, in other words, buy into companies that historically make good earnings and pay out good dividends, suggests another analyst.

You should also compare those dividend yields (the money paid out annually by the company as a percentage of the value of the shares) to returns you can get from government securities.

Even great dividends typically return less than 10 per cent of the value of the stock in a year.

Scotia Group (SGJ), National Commercial Bank Jamaica (NCBJ), and Carerras (CAR) are some of the locally listed companies that have consistently delivered good returns, says Reid. “Case in point, SGJ’s dividend yield is at 6.86 per cent and Carreras’ dividend yield is at 16.12 per cent,” he said.

Those returns don’t exactly get the blood pumping, but tax-free capital appreciation (when the price of the shares you have bought go up) can certainly do the job. Stocks recently listed on the Jamaica Stock Exchange (JSE) Junior Market have generally done well.

The Junior Market Index climbed by almost 100 per cent last year, and had risen by 72 per cent (annualised) over the first 10 months of 2012, when compared to the same period last year.

Importantly, when the price of the stock goes up, the gains are not taxed.

In other words, if an investor buys 1,000 units of a stock for $50 per share and subsequently sells those units for $80 per share, that $30,000, or 60 per cent, capital gain on the disposal of the investment is not taxed.

JSE’s General Manager, Marlene Street-Forrest says that as many as nine new companies could list on the Junior Market this year, plus another three on the main market.

But before you start counting the millions you could make, you should first consider an investment strategy that will determine how to balance your investment in stocks with other assets, such as cash and government securities.

Let’s say you determine that you are a somewhat moderate investor and you put 40 per cent of your money in stocks, 35 per cent in bonds and 25 per cent in cash. Should you experience similar performance on the stock market, like 2011, the returns on equities would aggressively outpace the other asset classes and could result in a portfolio make-up that looks more like 70 per cent stocks, 25 per cent bonds and five per cent cash, a year later.

“With equities being the riskiest of the three, it would be especially prudent to do some realignment to get the strategic asset allocation (SAA) back on track,” said Reid. “Therefore, in the rebalancing process it would be an opportune time to reduce the equity position to the SAA by taking some gains on the equity portion and reallocating to the other asset classes.

“In addition, having liquidity available in a very dynamic and fast-changing market gives investors the chance to grasp exceptional opportunities when they arise.”

Apart from maintaining a certain balance among the different types of assets in your portfolio, Waldron-Gooden says that in order to get the best returns from investing in equities, “one must diversify”.

“To diversify means that even though you are investing in one asset class (equities/stocks), you may create a portfolio mix of equities that belong to different industries, sectors — this also reduces your risk,” she said.

In other words, instead of holding only stocks in banks, say National Commercial Bank (NCB) and Scotia Group Jamaica, you could look include other companies like Carreras, Sagicor Life Jamaica, and other non-banks.

Whichever stocks you do decide to buy, you should look at the fundamentals of the companies, and pick the ones that are sound.

Those would include companies with business models that are easy to understand and whose sources of income are easily identifiable.

They should have good management and strong corporate governance practices, and strong cash flow from core operations that reduces reliance on debt financing while affording the company the opportunity to make new capital investments.

And ideally, they should have a relatively low share price to earnings per stock and price to book value (preferably those with share prices below book value).

A basic rule of investing in equities, says Reid, is “never to get greedy”.

“Stocks are extremely volatile and the gains that you have today may be gone tomorrow. Therefore, taking some profits off the table (whether by selling a percentage or all of the holdings in that particular company) would certainly be a sound strategy to undertake, especially for those companies that have exceeded their target price or fundamental value.”