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Investing revolves round brave decisions

5 March 2014, Column

Collectively, the Greeks have gone backwards by 25 per cent since the latest crisis burst in 2008, according to recently published IMF figures. Naturally, this is something of a harrowing observation – especially since the average Greek did not even make the decision to take above-average risks that may have led to such a negative result. It’s investors who do that – (hopefully) consciously. But how do you keep the risks involved firmly in hand?

When you look at the current yield summaries put out by the investment houses, taking risks with equities appears to be being well rewarded, with some great returns.

And in many cases, the results viewed over the periods of 1, 3 and 5 years usually seem to be very attractive. But don’t be misled: the dramatic investment year of 2008 has now dropped off the screen and is no longer included in these summaries.

Any investor who was able to match the return of the Dutch AEX index over the period from 1st January 2009 through to the end of 2013 is now +55% better off. However, if we take 1st January 2008 as the start date, then the result drops into the negative – to -20%!

If the same investor had opted for less risk by holding a worldwide selection of equities, then the results (based on the MSCI world equity index for all countries in €) would have been +75% and +11% respectively. There is a world of difference between the two, which just goes to show that you always need to ask for the long-term results.

I can answer the question of whether things can be different (i.e. better) with a resounding ‘yes’. Although it is not an easy thing to achieve a better result than the average benchmark, year in, year out. However, it is possible, over a period of several years, to achieve a better result – on average – by using a policy that is more active than ‘buy & hold’. The key to this success is simple: in the good years, you need to be able to match the result from the equity market, whereas in the bad years, the aim is to limit your losses. Achieving an outperformance is then within reach over time.

Although there are various possibilities for limiting the downward risk, I want to concentrate on the simplest way: cash. If you make sure that in less prosperous times part of your portfolio is not invested in equities, the total value of your portfolio balance will be hit less hard than if you are tracking the index. Which is the first way of giving yourself an edge.
Yet that is easier said than done. It is a well-known fact that many investors find it difficult to sell an equity once they have bought it. They’re convinced that the equity they have bought will continue to go up, or else they hope – sometimes against all expectations – that better times will come back.

But when the underlying economic growth in the markets where you are investing starts to lose its momentum, stagnates or contracts, it is unlikely that the markets will continue to rise. Indeed, markets always react to the expected developments. The only thing you can’t know is when that reaction is going to come and just how big it will be.

Yet in economically less favourable times, it’s a question of going with the flow and gradually making part of your portfolio liquid. The likelihood of the markets rising substantially in less well-favoured times is limited. Then, if a sharp fall follows, you will feel it appreciably less and on balance you will be rewarded for your courage.

You then need to take a second big decision to make that edge even bigger – namely choosing the time to reinvest your cash back into equities again. As soon as your analyses indicate that economies are in with a chance of recovering, I would – albeit in stages – reinvest the cash in equities. You may probably be a little too early, but by continuing to buy at the bottom of the market, you increase your chances of being rewarded over time. And time in this instance is an essential element.


Asset Management


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