“You’ve got to know when to hold, know when to fold and know when to walk away”.
— Kenny Rogers, singer, said it best in his song.
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| Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Portfolio growth is desirable; however, the center of attention ought to be on capital protection." |
Vancouver, BC (November 1, 2007): Have you scanned the business bookshelves lately? They have plenty of titles professing how to get rich quick. Temptation must run high at times.
Adrian Mastracci, portfolio manager with Vancouver’s KCM Wealth Management, says, “Professionals who manage money adopt a style of investing. One that they are comfortable with. Perhaps, more than one style”.
Today my focus is on one investment style that I label “managing money not to lose it”. For me, it forms part of a core of money management strategies for the long run. Of course, this style has a flavour of both an art and science.
Every advisor is asked, “what is your portfolio return”. From which investors make a slew of decisions based on the answers. However, I suggest that the better question is “how do you protect the nest egg during a downturn”. Bear markets do come along. It’s a question of when, not if.
Keeping the accumulated investment gains is not always easy. Portfolio growth is desirable; however, the center of attention ought to be on capital protection. Major market corrections create havoc for the nest egg. It takes a hill of gains to recover from large losses.
For example, the bear market that began in 2000 produced losses ranging between –36% and –77% in North American indices. Conversely, the bull market gained between +90% and +150%. Hence, the Toronto Composite has returned near +3% per year, while the NASDAQ a –8% per year, from the market top of 2000.
1. Avoiding this picture
This is the dreadful picture investors want to avoid. Let’s paint the pain of incurring portfolio losses:
| If you lose this much |
You need this much gain to breakeven |
| –10% |
+11% |
| –20% |
+25% |
| –30% |
+43% |
| –40% |
+67% |
| –50% |
+100% |
| –60% |
+150% |
| –70% |
+233% |
| –80% |
+400% |
| –90% |
+900% |
| –100% |
It’s Broken! |
Wise investors rightly take the spotlight off the performance goals. Better yet, outperformance. Instead, they concentrate on protecting the accumulated nest eggs.
Losing 10% of the portfolio requires a gain of 11% to erase it. That’s doable. Contrast that to losing 40% and having to unearth a 67% gain to overcome the deep hole. That could take years.
What is most detrimental to portfolios is not incurring losses. Rather, it’s keeping them far too long. So, never confuse the original price paid with what ought to be done with sour investments.
2. Trying not to lose it
Investors cannot stop all losses from affecting the portfolios. Here are some elements of “managing money not to lose it”:
- Start by asking where personal finances ought to be, say in 5, 10 or 15 years. What it takes to get there. That drives the importance of capital protection vs. growth. It also influences portfolio design.
- Avoid emotional attachment to investments. It’s the biggest culprit for incurring losses. Moreover, assume that some investments will result in losses. It’s part of investing.
- Establish the personal threshold for losses, say 20%, 30% or 40% less than the purchase prices. Then cut the losses and stop the bleeding by selling at least half of the position if the personal threshold is reached.
- Investment risks may seem too high for comfort during jittery markets, like those of today. One preventative action reduces some equities and temporarily invests the proceeds in fixed income.
- Don’t second-guess the investment decisions to cut or prevent losses. Concentrate on where the portfolio is headed, not where it’s been. No regrets.
Investing is a game of probability. Yes, investors and professionals can bail out too early. However, successful investing is about being right more often than wrong. Nobody has a perfect record.
Managing money not to lose it is not foolproof in every market situation. It adds real value to the portfolio more times than not.
Heed the words from Kenny Rogers’ song. Know when to hold, when to fold and when to walk away. The investment experience should improve.
I welcome your questions, comments and opinions.
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