By Dawn Ridler*
Timing of the markets is like trying to catch a falling knife. You are very likely to catch the blade and do yourself a nasty injury. It is much more sensible to take the offending investment out of the knife block and dispose of it gently and safely – and make money in the process.
Every one of us has a seed of greed in our brain, dying to be watered, germinate and sprout. Some of us give it more love and attention than others, then act surprised when it turns into a full-blown monster.
Wanting to milk the markets for every last drop of growth is a very human ‘greed’ response and can really damage the value of your portfolio in the long term. If you try to time the very top of the market, you are likely to do one of two things: Bail out every time there is a little wobble, only to pour back in when it starts climbing up again, often above the level that you bailed out at. Or…You do that for long enough, you start to think the downturn will never come and forget to bail-out when the big one comes, having potentially lost some great recovery days.
Just as the stock market can sink like a stone in a day, it can rise on a rocket too.
Missing on those couple of ‘rocket’ days, while you lick your wounds from the drop, can literally halve your potential growth in a year.
If you have a ‘dog’ in your portfolio – whether a unit trust/CI (Collective Investments) or share – ask yourself: would I buy that share/CI today? Obviously you only invest in something that is going to go up, right?
So if the answer is no, sell it and put it into something that you believe in. Hanging onto it when you wouldn’t buy it now is an emotional decision, not a rational one.
Here’s a tip. Investments really don’t have feelings and they are not going to be ‘hurt’ if you junk them. – Dawn Ridler
At the moment a lot of people are hanging onto resources shares or collective investments that have performed appallingly over the last 5 years.
Is the sector primed for the take-off we’ve been growing cobwebs waiting for? Probably not. The oil price isn’t going back up to over $100 any time soon, and the big consumers of iron, coal, aluminium, platinum (China, India) just aren’t growing anything like they were a few years ago. We have settled into a ‘new normal’.
Yes, the general equity sector in 2015 is unlikely to shoot the lights out in 2015, but it is probably a better bet than resources. In fact any sector is probably better.
If it is a long term investment (more than 8 years) and it is keeping up with its peers, sit on your hands. By all means compare it to the benchmark, the index and its peers from time to time, but let it grow.
If it is a long term investment and not in a prescribed retirement fund (Retirement annuity for example), then a ‘passive’ investment in an ETF (Exchange Traded Fund) may make more sense than paying fees to an asset manager for a little bit of extra, only to give it back in fees.
If you just can’t leave it alone, take the emotion out of the decision to sell. Set a stop loss of, say, 5%. Set a buy-back point too. Chopping and changing like this will incur costs at some stage.
Have a written objective for the investment, linked to inflation. For an equity investment, say CPI plus 7%. Make sure your heart understands that anything in excess of this is a windfall.
Trying to squeeze the last drop of the growth out of the market now is a gamble. Call it what it is and be comfortable with it. Perhaps lock in your profits and ‘play’ with your profits.
Even though you may pay more in asset manager fees, look at moving your equity investments from ‘general equity’ to ‘flexible equity’ collective investments (or unit trusts) if you feel the market is nearing the top.
Why? All collective investments have to abide by their ‘mandates’ and for general equity it means they have to stay a good 90% invested in equity, even if they see a train smash coming. Flexible equity funds don’t have to, so often their downside is less than a general fund. They can for example move investments into cash or bonds during a downturn.
Actions: Go over your investment portfolio with your financial advisor or coach; own up to unhelpful investment behaviour and get help.
* Dawn Ridler is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.
This article is published here on BizNews.com with the kind permission of Dawn Ridler. Copyright: Dawn Ridler.