Business

When to toss your investment rules?

The Sterling Report

BY Yanique Leiba-Ebanks

Sunday, October 20, 2019

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I got you there, right? Of course, the short answer to that question would be never. But, let me give you a little background as to how this question got started.

There has been a lot of activity in the stock market, sometimes people get excited over certain issues, other times, people may invest, not because of a conviction in the investment but because everyone else is doing it.

This is the time when people are tempted to change their rules.

What are the investment rules?

Well, individuals and institutions have their own. However, the key is to be consistent. Here are some thoughts that may help to shape your rules.

A RISING TIDE LIFTS ALL BOATS

The proverb “A rising tide lifts all boats” means different things to different people, but for me it is a reminder not to get overconfident.

It happens to the best of us. You buy some stocks, your portfolio looks great, and your first thought is: how smart am I? However, it is important to remember that when a stock market is buoyant, like any other market, many or most of the stocks will rise in price.

This is not necessarily an indication of how brilliant your stock-picking skills are; therefore, a little humility is necessary when judging the success of your portfolio.

Conversely, a slump in the market doesn't suddenly mean that you have no skills.

DON'T PUT ALL YOUR EGGS IN ONE BASKET

The second proverb is “Don't put all your eggs in one basket”. It is very easy to look at different markets and (continuing with the stock example) to start to exclude other assets.

To you, it is simple, you go where the hype is, so you decide that you have no time for bonds or other fixed income investments. The issue with that is that it is very difficult to time the market. So maybe stocks are up now, but it is hard to say when they will dip.

The bottom line is that you should still maintain a balanced portfolio.

“This time is different”.

It is never a good idea to totally buy into that idea. Very often things only appear to change, but given time, people are highly susceptible to irrational optimism and quite frankly greed.

Yes, it appears that there is money to be made, but it doesn't mean that all of your rules and caution are to be tossed to the wind. In fact, this is when it is needed the most.

I have mentioned Argentina before in previous articles, but after the default in 2001, they were shunned by the international community, then in 2017 they had a triumphant return to the bond market, raising 2.75 billion of a 100-year bond. However, the tide quickly turned on them with their investors crying once more, as there are fears of another default looming. Interestingly enough, the country has already had eight defaults in their history.

SHOULD YOU TAKE YOUR GAINS?

This is the hardest question. Early in my career, my then boss advised me that you take your gains, you go back in, you take your gains again etc, etc.

However, this is not always easy to execute.

Firstly, if you have a buy and hold strategy, then read no further.

But many an investor will recount how they sold too quickly or took too long to sell. It can be very upsetting when you feel you have mistimed the market. But it happens.

If you sold too early, don't cry, just invest in something else that hopefully will give you some upside.

If you took too long to sell, and you are still confident that the company's prospects are good, you can average down on your investment.

The most expensive strategy of all is constantly changing your strategy. That can cost you both in transaction costs, potential gains, and even worse, terrible losses.

Once you have developed an informed framework, do your best to stick with it! Happy investing!

Yanique Leiba-Ebanks, CFA, FRM, BSBA, is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.


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