KEEP EMOTIONS OUT OF YOUR INVESTMENTS
Not letting emotions cloud your investment judgment is easier said than done, especially when the market is not looking particularly good. Here are four tips to help keep your emotions in check.
just as investors started to cope with the “Sell in May and go away” dilemma, June struck with a brand new bout of uneasiness. In the week up to 14 June, the FTSE/JSE All Share Index (Alsi) already lost more than 5% of its value and many investment specialists reckon that this is only the beginning of a relatively tough time ahead.
I was recently asked what my first recommendation would be to an investor given the current market conditions. Unlike the masses, it wouldn’t be to seek salvation in offshore investments or even to give preference to a specific asset class. My number one investment recommendation would be to keep your emotions out of your investments, especially now.
Well-known philosopher, Bertrand Russell, said: “Control your emotion, or it will control you”, which fits in so perfectly with the management of your personal investments. Your emotions can prevent you from thinking clearly and may allow you to make investment decisions which can lead to an array of negative consequences over the long term. The best way to illustrate my point would be to use an investor who decided to invest in the stock market on 22 May 2008. Not only did they buy into the market as it reached peak levels, but had to watch as the stock market lost more than 40% of its value later that year. The investor who allowed their emotions to control them would probably have sold all their investments out of fear for even greater losses, and probably wouldn’t have been able to make up for those losses.
The person who controlled their emotions, however, would have boasted a portfolio (before taxes) which managed to outperform any money-market investment as at the end of 2012, following one of the greatest recessions of all time. In principle it sounds relatively easy: I just have to keep my emotions out of my investments, right? Unfortunately, it’s easier said than done, so how should we go about keeping our emotions at bay?
1. Do your homework properly
When you buy a share or any other investment, your decision must be based on proper homework and analysis. You are spending your own capital and no one cares more about your money than you do. If you feel that a particular investment doesn’t fall within your field of knowledge, don’t hesitate to consult an investment professional.
2. Try to determine what can go wrong in advance
There are many tools available that can simplify this process for you. If you consider investing in the Alsi knowing that it lost more than 40% of its value in mere months less than a decade ago, you may either think twice before making this investment, or you may be prepared to see it for what it should be: a long-term investment. Take a look at shares’ volatility and if you prefer investing in unit trusts, take a good look at fact sheets and analyse figures such as volatility, negative months versus positive months, and Sharpe and Sortino ratios, which measure riskadjusted returns.
3. A weight that won’t break the scale
There is a saying, “Don’t bet the farm”. It is true that you can’t win if you don’t play, but it’s also true that if you don’t play, you can’t lose anything. Keep your positions and exposure to a minimum and more importantly, within your risk profile. Be sure to determine your maximum risk tolerance before you invest, and stick to it.
4. Get a hobby
So you did you homework, you know what can go wrong and you invested within your risk profile. What next? Buy a mountain bike, a set of golf clubs or even a good pair of running shoes and leave your investment alone over the short term. Of course many of you may disagree with me on this point, but something very serious has to go wrong before you will need to make drastic changes or even sell out. Shares remain one of the best asset classes out there, as long as you keep it and monitor it over the long term (seven years or more).
My number one investment recommendation would be to keep your emotions out of your investments, especially now.