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    Investment Strategy

    Earlier in the week I wrote about how active managers are able to outperform the market. While outperforming a benchmark is great, and getting good absolute returns is also sought after, it is no good to choose the best manager but then not have enough capital to invest with him. It is important to have sufficient capital invested in order to retire comfortably.

    After going through 5 years of excellent absolute real returns until October last year, where significant capital has been accumulated, we have hit a bumpy patch. Returns have been more volatile, and the rand has also been unstable (and trended down quite significantly). There are many ‘problems’ that should affect both local and global markets. News flow isn’t that great.

    It is in markets like these that the average investor will be more inclined to hold off on their investments, instead letting their disposable income sit in their bank or other interest bearing accounts, until there is more ‘clarity’ on the direction of the market. The rationale behind this kind of decision is that rather wait until an investment can be made that will yield attractive returns, than allocate capital to an underperforming asset.

    For this reason investors are understandably jittery about investing, but it is often when investors are most nervous that the largest opportunities are available. Many value managers have been delighting in the quality companies that they have been purchasing at low PE multiples, and high dividend yields. These qualities have historically led to superior performance over the longer term, but you need to be in the market when it takes a turn for the better, otherwise you will have missed out on a good opportunity.

    Investing isn’t a science, and no one has a crystal ball that can tell them where the market will be in 12 months time. In times like these the old axiom, “it isn’t about timing the market; it is about time in the market” is so true. While there is a place for moving a portion of your investments into and out of the market when values are at their extremes, the most important decision is getting the basic allocation correct that will ensure that you achieve your investment targets.

    Investors close to retirement will obviously have a shorter time horizon than those who are far away. For these older investors timing the market does become slightly more important, particularly if their asset allocation needs a major overall. While their time in the market won’t be as long as younger investors, with the advances in medicine one can expect to live for around 25 years in retirement, hardly the short term. For those investors who want to leave money for future generations their investment horizon begins to extend even beyond the 25 years, and will be influenced by when the beneficiaries will retire.

    Investing is all about assessing the available information, and making decisions accordingly. Understanding how the markets move, and the main reasons to be invested will dramatically increase your chances of being successful. If one simply says that markets tend to move up (in the long term) and that the main reason to investment in the market is to earn a high enough return on your assets to retire comfortably, then it makes sense that you need to have a significant portion of your capital invested in the market for a considerable portion of time in order to achieve your goals.

    I haven’t sought to provide a comprehensive list of how to be a successful investor, but rather provide some food for thought on the importance of having a strategy before making your investments. As with any activity, if you are able to sit down beforehand and think about what you’re going to do, and how you will react to certain situations based on what you want achieve from that activity, you will have a better chance to succeed than if you went in blindly.

    Enjoy your weekend, good luck to the Sharks and Stormers in their quest for a semi final!

    Mike Browne

    Permalink2008-05-09, 16:15:43, by Mike Email , 1 comment
    Trackback address for this post: http://blog.sharenet.co.za/htsrv/trackback.php/760

    Comments, Trackbacks:

    Comment from: Investing Money Strategies [Visitor] Email · http://www.investingmoneystrategies.com
    This blog is relevant to Investing Money Strategies that always one might think of the future and must desire for the long term goals.
    PermalinkPermalink 2008-05-21 @ 11:43

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