After the very nice bull run since 2008 that should have seen a doubling or tripling of an investment, you’d be forgiven for thinking it is going to last forever. The debt crises of 2008 left deep scars on the emotions of most investors who saw 30% or more of the capital in their investments evaporate. Just prior to the crash of 2008 there was a feeding frenzy on the stock exchange – a lot of that from individual investors. The smart investors were already starting to sell out of stock portfolios in Nov 2007. What I am seeing now is much of the same sort of behaviour, especially from individual investors, and it is time to take a step back and make sure you’re not putting those hard-earned investments at risk.
Buy high, sell low : This phenomenon can be explained by the new acronym, FOMO. Fear of missing out. The stock market breathes in and out, that is just in it’s nature. Sometimes it hiccups, jumping up and down by a few percentage points for no reason. Occasionally, just like us, it heaves a heavy sigh and sheds some 10, 20, 30%. It’s going to come sooner or later and the longer the bull-run continues, the probability grows. When individuals wake up to the fact that everyone in the stock market has doubled or tripled their money, FOMO kicks in. More often than not these ‘inexperienced’ investors will buy shares online, get involved in day-trading or (more sensibly) buy ETFs or other trackers – Of course prudently saving stockbroker or advisory fees of 1%. Winning! Those financial ‘nannies’ (like me) might have been as silly as to try and tell you that stocks are a long term (8 yr plus) investment and try and get you to make your investment less ‘aggressive. What! And leave all that money on the table! Then the market turns, and those investors hang on and hang on hoping for a turn around, until they can take it no more and bail.
Allowing greed or fear to rule your decisions: Many people will get to the later years in their life and wake-up to the fact that they have not made enough provisions for retirement and fear kicks in. There are a number of ways to remedy this. You could start saving more – slow and painful but effective. You could lower your expectations for retirement – again painful but hopefully far enough in the future for you to ‘get used to it’. Finally, you could tweak your asset allocation (cash, bonds, property, stocks – read more HERE) so that you get more growth. Painless! Yay! Of course there are limits, both to its effectiveness and prudence. Can you afford to put a 30% hole in your capital in the short to medium term? If you’re 10-15 years from retirement then yes, you can probably afford to make your investment much more aggressive. Less than that? Not so much. Given the choice between a painful and an easy choice, easy is going to win – unless you step in and recognise the actions of the greedy demon whispering in your ear.
Rushing in where gurus fear to tread: Financial and Investment advisors, let alone asset managers, spend hours every week watching and researching the market and listening to economists so that they can make qualified decisions on behalf of their clients. This isn’t a matter of daily trading stocks or unit trusts it is more the finding of a ‘house view’ of what the asset allocation should look like – especially for medium and long term investments. Short term investments should really be in ‘cash’ or ‘cash and bonds’. Not only does the stock market breathe in and out, but the different sectors in the market do so as well – often not at the same time. Take resources for example, they have been breathing out for 5 years. Property on the other hand had been hyperventilating, and in mid-April took a time-out correcting by 11%. To get back in the same place the market is going to have to recover 22%. If the ALSI had done that we’d all be bleeding. Using a ‘tracker’ is a good idea, but unless you really know what you’re doing stick with a general one don’t go fishing in niche waters – you’ll lose more than your bait.
Not diversifying: When greed and fear are allowed to run your portfolio, prudent advice like diversifying your investment often goes out of the window. To put it bluntly, if you haven’t got at least R5-10m to invest in a diversified stock portfolio, make sure you can afford to lose 100% of it. If the sum is less than that, go for an exchange traded fund (ETF) but not in a niche of the market. More than anything else, if you’re doing it yourself do the studying and research. Understand the markets, the sectors, the economy and regulatory environment. It can be a very interesting hobby – it is not only not cool to be clueless it’s downright dangerous to your DIY investments.
Not knowing your limitations. I know it isn’t fashionable to talk about limitations. Everyone is a winner, you can do anything if you set your mind to it, close your eyes and it will ‘secretly manifest’ if you wish hard enough, etc. Ok, now that those terms and conditions are out of the way, let’s talk about reality. If you aren’t prepared to do the hard work and spend the time daily researching the markets, asset classes, economy, underlying costs, risks, regulatory environment – it doesn’t matter how smart you think you are you’re going to get a snot-klap. There are short-cuts – but they aren’t likely to be free. Not many professionals will let you ‘pick their brain’ for nothing anymore.
Action: Take a step back and audit your investment ability and motivations. You need to strike a balance between abdication and over-confidence. Now is the time to protect your capital, especially capital needs for the next 5 years.
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Author Dawn Ridler