If building wealth is high on your list of priorities this year, and you’ve managed to bring your debt to manageable levels and already have an emergency fund, then you are in a prime position to concentrate your efforts on investing to build wealth.

Take the case of best friends Amira and Chauntae, both 32-year-old professionals who, last year brought down their credit card debt to manageable levels after finally becoming serious about pursuing their long-term financial goals. Last year they began educating themselves financially. Amira, a marketing executive who had to curb her insatiable appetite for online shopping and expensive dining, began to hone in on building a nest egg for her retirement. But she worried that whatever she saved over the next 28 years until retirement would never be enough for her to live comfortably. Cash in the bank, she is aware, loses value over time. Chauntae, on the other hand, works in public relations and is not a great spender like her friend. She had amassed savings of over a million dollars with no real plan for how it could work for her. She wants to buy a house in the next five years but with the prices on the market for the kind of home she is interested in, she is worried she’ll never save enough for a downpayment. However, both women realise, through reading these financial columns, that they need to make their money work for them.

Investing, they decided, was the way to go because, while returns are not guaranteed, it has the greatest potential to outpace inflation over time and help them reach their financial goals. Investing in the stock market makes good financial sense for investors like Amira and Chauntae who are looking to achieve medium- to long-term goals. Stocks are ideal since they typically offer higher returns than more conservative investments like bonds or savings accounts. Over time, if they select stocks in the right companies, they will grow, and with reinvested dividends, the potential for compounding returns increases. As the company grows, the value of shares typically increases, giving them the opportunity to sell their shares at a higher price.

Determining Risk Appetite and Managing Risk

Understanding that no one can 100 per cent accurately predict the market, both women knew they had to find a strategy that suited their financial goals to limit any potential loss their stock could suffer due to the stock market’s unpredictability. Their NCB Capital Markets wealth advisor asked them some key questions to gauge their risk appetite to ensure that they’re making decisions aligned with their comfort levels. When deciding how much each of them should allocate to stocks, the advisor also considered their time horizons. Amira, with a longer time horizon of 28 years, could afford to take on more risk and invest a higher portion of her funds in stocks. Chauntae, who has a shorter time horizon, required a more conservative approach, could invest a smaller portion in stocks to align with her lower risk tolerance. To manage risk, diversification was key for their portfolios. By spreading investments across different sectors and asset classes, they could minimise the impact of poor performance in any single stock or sector. This is the financial equivalent of the adage of not putting all their eggs in one basket.

The importance of selecting stocks based on their fundamentals

Amira and Chauntae’s wealth advisor told them that choosing stocks best suited for their individual investment goals is one of the most crucial decisions they had to make. So, it was important for them to pick stocks based on their specific goals and the strength of the companies (ie their fundamentals), and not simply mimic each other’s or other people’s choices. Which is why selecting stocks requires a disciplined approach based on careful research. The wealth advisor offered guidance and research to help them build their portfolios. She advised them that the decision to invest in and the number of stocks to include in their portfolios depends on their financial goals, the time they are targeting to reach their financial goal and, importantly, their tolerance for risk. She advised that when selecting stocks for their portfolios, they should focus on, among other things, thoroughly understanding these businesses; ensuring they are domiciled in strong, long-term growth industries; and confirming that they have strong leadership who are also heavily invested in the business.

Types of stocks

Their wealth advisor also informed them that there are two primary types of stocks that beginner investors should be familiar with: value stocks and growth stocks. Both types serve different financial goals and risk profiles.

The wealth advisor explained that value stocks are typically from mature companies with steady cash flows and stable profits. These companies are more likely to distribute dividends to shareholders, providing a reliable source of income for investors while they hold their stocks until they are ready to sell. Dividends can take the form of cash, or additional shares, and can become a tool for income generation and wealth building over time. Chauntae, with her medium-term goal of buying a home, is focused on more stability, so value stocks may be a suitable choice for her. These stocks are less volatile than growth stocks, providing consistent returns that will help Chauntae reach her down payment goal in the next few years.

On the other hand, growth stocks are from companies that reinvest their profits into expansion and growth rather than paying dividends. Over time, as the company expands, its share price may increase, providing the opportunity for substantial returns when the investor eventually sells. While growth stocks come with more risk, they offer the potential for higher capital appreciation. This makes them a better fit for investors like Amira, who has a higher risk tolerance due to her time horizon. Although she might take on more risk by investing more of her funds in growth stocks, they align with her goal of securing enough for retirement in 28 years.

Fundamentals! Fundamentals!

Once they decided on the types of stocks they were interested in, the next step for Amira and Chauntae was to examine the companies’ fundamentals. A company’s financial health can be analysed through its audited financial statements to determine its profitability, debt levels, and overall performance. A solid balance sheet with low debt and a healthy cash flow is indicative of a company less likely to struggle during economic downturns. Because the company is publicly listed the information can be accessed through its latest annual report which can be found on the Jamaica Stock Exchange website, through company financial reports, and even resources like financial news media outlets. However, Amira and Chauntae don’t need to conduct this research on their own. Their wealth advisor will provide them with research analyses and investment recommendations, helping them navigate the information and make well-informed decisions based on their financial goals.

Bottom line

Amira and Chauntae took charge of their financial future by making informed investment decisions, and now they’re on track to achieving their long-term goals. The same opportunity is available to you. Whether you’re saving for retirement, a major purchase, or simply looking to grow your wealth, investing in stocks can be a powerful tool. Now it’s your turn! Send “MYWEALTH” to WhatsApp number 876- 876-728-7075 today to assess your risk profile, identify the best investment opportunities, and craft a strategy tailored to your financial goals. The sooner you start, the more time your investments will have to grow. Take the first step and follow in the footsteps of Amira and Chauntae by starting your own financial journey today. With the right guidance, a clear plan, and the discipline to stick with it, you too can invest in stocks and watch your wealth grow over time.

Kimberley Martin – Assistant Vice-President, Corporate Solutions, NCB Capital Markets Limited Paul Mullings