Knowing when to sit on your hands

Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)
Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)

Until fairly recently, my youngest daughter competed in the South African XC mountain bike race series. With this particular type of race, the track is so gruelling that it is nearly impossible to even walk on it. It normally ends exactly where it begins, and the number of laps is determined by the length of each track.

Anyone who has taken part in this Olympic sport will tell you that it’s definitely not smooth sailing – not even for supporters. There are usually two technical/water points where participants can either obtain water or food, or get help with technical problems on their bicycles (or treatment for injuries).

As a supporter, I’ve found myself between a rock and a hard place quite a few times. Despite the fact that I used every ounce of energy to get to a technical point to assist my daughter, I arrived there just in time to see her fly by. 

Of course, I felt horrible, so I started running after her in an attempt to make it to the next water point, only to see her fly by yet again. The truth is that although I arrived at the WRONG water point, I was still in the RIGHT place. I just should have waited there, as opposed to following the “herd” to the next water point. 

The herd is not always wrong, but in most cases, investors end up making the same mistake as this “father of the year”. 

It is normal for panic to set in, especially when everyone around you starts to scramble. A lot of investors succumb to the pressure of how others respond, and stagnant growth or declines in the market aren’t making things much easier. 

Everyone’s got some advice on what the best investment is right now, and many people follow that advice without thinking it through or doing proper research. Some are labelling bitcoin the new gold, while others say gold is making an epic comeback. Some are even selling off all their current investments with the aim of investing in last year’s winners or “water points”. 

But here’s the thing – it’s all about supply and demand. When a new trend hits, demand rises, and the product or investment becomes more expensive. When the market becomes saturated, demand decreases and supply increases. This often leads to a decline in prices and, inevitably, to investors losing money. 

Another problem is that, by the time investors hear about this new trend, it’s often already too late. Yet they still invest. 

Over the years it has been proven that “safety in numbers” is not always the best strategy to follow in the investment world. 

Before you follow the herd, either because you feel pressured to do so, or just because you feel like taking chances, think about the following:

  • It costs money to constantly make changes to your portfolio. Capital gains tax is a massive consideration, and when it comes to share portfolios, you also have to consider brokerage costs and/or transaction costs. These fees, if not managed properly, can have a severe impact on the growth of your portfolio. 
  • More often than not, the “advice” given by the herd, falls outside of the panicked investor’s risk profile, and that can lead to capital losses. If you feel uncomfortable with the implementation of a particular strategy in your personal portfolio, trust your gut. Rather have a conversation with your financial adviser before you make the move and be sure to discuss ALL the options available to you, and ALL the consequences of the suggested strategies.
  • If you have done your homework by researching a particular company, and you feel comfortable with its business model and intrinsic value, that should give you peace of mind. Its far safer to do the work and to know what you’re investing in, than to invest based on hearsay.  
  • Very few people become rich overnight. An investment is as a long-term commitment. Have realistic goals and keep your emotions out of your investments. 

Amid the noise, investors can end up confused. They can lose focus and make decisions that they might end up regretting at a later stage. Charlie Munger, vice-chairperson of Berkshire Hathaway, said it best when he commented on investors who constantly jump from one investment to another: “Assiduity is the ability to sit on your ass and do nothing until a great opportunity presents itself.” 

Schalk Louw is a portfolio manager at PSG Wealth.

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