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.

Finweek English Edition - - FRONT PAGE - By Schalk Louw ed­i­to­rial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

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.

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