Advice for Investors in Times of Uncertainty

There is an old Chinese curse which says: “May you live in interesting times.”

Anyone with money invested in the stock market may feel that those times are upon us, and indeed that things are likely to become more interesting rather than less so in the months to come.

Jacques Magliolo, a South African investment and corporate strategist, has written a book entitled “The Millionaire Portfolio – Your Guide to Making Money on the Stock Market.” Not only does Jacques provide a solid introduction to the world of equity investing, he also dishes up a wealth of thought-provoking material for the more experienced investor.

Jacques warns of a few common pitfalls that investors should avoid. Although he directs this advice to the beginning investor, the more experienced among us should also take heed. In uncertain times, even experience may not save us from irrational acts. Jacques provides twelve “commandments” that we should all follow:

Don’t panic. It is human nature to panic at the first sign of trouble in the market. Bear trends can unsettle the most experienced investor, and the last thing you want to be doing is selling when the market is falling, only to buy again when it climbs.

Ignore market fever. Whichever way the market is moving; this should not affect your portfolio mix. Your long-term investment programme should be based on investment goals, time horizon, risk tolerance and personal financial circumstances. Short-term market movements should not cause you to mess with a good long-term strategy.

Do not abandon shares in which you believe. It is tempting to sell a share that falls in value without warning. Resist the temptation. Over time, shares have provided the highest returns and the greatest protection against inflation. Bonds may offer higher income, but are affected by interest rate changes. Cash reserves held in the money market are not going to protect you against inflation in the long run.

Avoid quick changes to a portfolio. As a general rule, it is not a good idea to make changes to a portfolio when the market is falling. Moving money from shares and bonds to more conservative investments in the hope of avoiding a loss or making a gain is seldom successful.

Invest regularly. Stock markets can be a little like casinos when you invest a large lump sum in a once-off investment. Invest at the top of the market, and you may not see decent returns for a very long time. It is often better to invest gradually, making the necessary changes over time in the allocation of assets to shares, bonds, and cash reserves. If an investment continues to be a worry, “sell to the sleeping point.” (The level at which you can sleep at night, and not lie awake worrying about the shares!) Gradual moves should be limited to 15% increments, e.g. an investor with a portfolio consisting of 75% shares and 25% bonds can move to 60% shares, 25% bonds and 15% in cash if equities are worrying them. When prices fall, investors can then move out of cash and back into equities.

Be diversified. Maintaining an investment mix of shares (for growth), bonds (for income) and short-term cash reserves (for stability) is a sensible way to hedge against many of the risks associated with investing. Remember that one of the key benefits of unit trust funds is their diversification. It is also wise, however, to diversify amongst different asset classes such as shares, bonds and money market funds.

Look before you leap. Every listed company is required to send potential investors a prospectus. Read it carefully, and compare the company’s objectives, costs and long-term performance against its competitors. Reinvest earnings. If you do not need the income, it is a very good idea to reinvest dividends and/or interest. Your earnings are then generating further earnings, beefing up your long-term investment returns.

Be realistic. The returns achieved by the three classes of financial assets (shares, bonds and cash) over the past ten years or so have provided investors with substantial capital gains. However, future returns may not be as impressive and investors should bear this in mind. In the long run, a balanced portfolio should nevertheless provide investors with a return which exceeds the average inflation rate.

Remember: “No pain, no gain.” Higher investment returns are generally accompanied by higher levels of risk. When investing in shares and bonds, you are going to incur losses in some years. However, in the long run the gains should offset the short-term pain.

Be patient. For an investor, the greatest ally is time. Once you have chosen a personal strategy, stick to it, even when markets fall. (The exception is when your personal circumstances demand some readjustments). Over time, the risk of losing money diminishes and the potential for profits increases.

Reassess periodically. Market movements change the value of an investment. It is important to maintain the portfolio percentage mix by regularly re-balancing your portfolio. You should do this at least once a year. Reference: The Millionaire Portfolio, by Jacques Magliolo.