Understanding Good Investment Strategies

Appreciation of Capital Idea

Presage

Although the majority of the people we meet throughout Latin America and the Caribbean, initially use our services as advisors to create the long term programmes to solve their retirement and children’s international university and college needs, at some time there comes a moment when we are asked to look at the Capital they have saved We find that they had been more concerned to seek a safe haven away from the vagaries of their nation’s economics and politics rather more, than instigated a diversed programme matched to their short, medium and long term goals. However, we are in a position to help them solely because, they, unlike the vast majority of their countrymen and women, did have the foresight and pragmatism to apply commonsense and initiate some saving discipline on themselves, throughout their lives. This really is so rare, within this part of the world (less than 8% of executive/professionals) that we must congratulate and commend them for their good sense.

However, once accumulated the most common complaint we hear from the people we meet “I don’t feel in control. Some years we do okay! Other years, we lose big time. Actually, I would be concerned about my tax position, if I had made any gains, but my Broker advised me to invest in some stocks and funds a few years ago and I am down about 40%” Those few who have made gains, worry, that sometime in the future, when they should be enjoying their accumulated wealth, that national tax authorities will, through the “Waiver forms” they have been blithely signing each year, have an obvious trail which will inevitably come back to haunt them.

They complain that they are persuaded to buy stocks or funds by people who sell, and they find that those individuals who sell, rarely are interested in pragmatically taking the conservative view. Instead, they link into people’s fears and greed, the system they are part off, does not wish to see investors locked into a long term programme, their commissions and bonuses are linked to their client’s activity, buying and selling. Instead of offering programmes, which educate and develop client’s understanding, matched to commonsense, they push on unsuspecting and unenlightened individuals, portfolio changes, or new investments opportunities based on performances of the last few years, with statements such as…Mr. S we have a hot fund here, which has provided those invested with 32% each year over the last two years. Is there any reason why you wouldn’t be interested in investing?

Slick selling and YES there are many reasons why they shouldn’t be interested. If the fund has achieved over a 70% rise in two years the likelihood of it continuing is mathematically unlikely. The scenario continues and the fund corrects itself downwards, the new client, facing losses, panics and sells and this cycle often continues, we often meet people whom over five years have seen their portfolio reduced to about 30% of original value. After we have assessed their future needs and provided our recommendations, we often are faced with the comment, “Can we avoid stocks please… I have had bad experiences before”. Actually, it wasn’t specific stocks that were the problem, but a poorly designed portfolio, without proper balance, with the individuals risk tolerance and overall understanding, never factored into the process.

The crash of 2000 to 01 in Technology stocks is a good example, some people near retirement had impossibly large parts of their accumulated wealth placed, totally inappropriately within these sectors, seeking they imagined, their last quick drive to retirement security. Many were wiped out.

Successful Capital investing is like dieting and exercise. Everyone understands the principles but few actually do it. Given a choice of steamed vegetables and fruit against milkshakes with double ice-cream scoops and chocolate chip cookies… Most choose the latter, even although we know what is better for us. The former are boring. Yes they are, and a successful Capital investment programmes for the long term is often boring.

Gambling and having fun are best served at a casino, where the ratios are understood and one can limit the losses. Every survey undertaking in the developed world amongst the highest wealth holders IE at least $1,000,000US net worth which form about 3.5% of the population, show that this section is predominately comprises of 80% self made individuals, living fairly normal lives who have, over their lifetime, systematically saved between 10 to 15 percent of their incomes, BEFORE paying their bills and allocating the remainder, into new cars, extra holidays, new clothes etc. They have a boring systematic approach to investing, they have a clear predetermined logical plan, which matches their long term goals. They do not scan the financial sections of their newspapers on a daily basis, nor do they trade, buy and sell often. For those seeking to build wealth, pragmatic works.

If they wish to gamble, they holiday in Monte Carlo or Las Vegas!

Pragmatic Capital Possibilities

Most investors know not to put all their eggs in one basket. Yet over the years we have met with many prospective clients, in many different countries, who believe because they have invested into different investments that their future is well protected. Unfortunately, your portfolio is not diversified unless your investment choices provide you with an opportunity to benefit from positive performance in different investment vehicles while aiming to minimise concentration in any one area that might decrease your overall return. Of course, your strategy should focus on the type of investment that best matches your primary objective -- but you should be sure to round out your portfolio with investments expected to do well under different market conditions. In addition to ensure that your strategy has the uninterrupted time needed to achieve its goal, a sufficient part of one’s portfolio, must be placed in such a way, with easy access, to ensure that emergency and change of life scenarios, can be met without the need to en cash part of ones balanced portfolio at an inappropriate disadvantaged time. See The Basics of Investments.

Capital Stratagies

If we look at the performance of the S&P500 throughout the decade 1980 to 1990, we see an average annual growth of 17.5%. An impressive decade. However, if an investor had missed the best 40 days then their gain would have been merely 3.9%. During the period of 1982 to 1997 if you had missed the best five or six years, then an investor would have missed around 80% of the total growth. Trading in and out of markets are normally always fatal and since records have been kept, there has never been a Professional Market Watcher, that has timed market corrections beyond a 30% success ratio. Therefore the spin of a coin would mathematically speaking be a better process. If less than 20% of Money Managers beat the markets over time, what chance those without their expertise, ease of access to research data etc., to do better if they chase the short term chance or to time the markets. It can be confusing and that can worry some.

A recent study of the five top record breaking Mutual Funds in the US between 1994 and 2004 found that the majority of investors sold at a loss. How could this be possible, with such top performing funds? The study showed that these funds are naturally more volatile. Most investor “jumped in” when the funds were doing well and they sell in panic when the funds were undergoing a correction, down much lower than when they bought. The vast majority of investor did not gain the excellent returns possible, for the simple reason that their emotions rule their decision about when to buy or sell rather than forming an investment plan, based on logic and adhering to it.

If we apply a little commonsense and take a longer view the process becomes so much easier.

History and people ( Demographics) are on the pragmatic investor’s side and makes their task much less a factor of chance. Since the beginning of the 20th Century, adjusted for inflation, the average wealth of individuals in the developed world has increased nearly tenfold. At various times and in different countries demographics plays a considerable role in the increase of expanding economies. A simple example would be the baby boomers born in the 40s and 50s. As they reached maturing, married, bought houses, raised families, educated children invested for old age etc., and spending an ever increasing amount doing so, developed country economies grew exponentially. Following demographic groups extended the period length and impact.

If we look at Asia and Pacific region economies, we see distinctly similar trends, where countries, under pressure from their predominately younger populations, seek change to better, their and their future children’s quality of lives.

History, informs us that at different times and under different economic models certain types of investments do better than others. This is a complicated matrix. Suffice it to say, that most models show a balanced and diversified portfolio will have the following structural form….

The above can be further disbursed across sectors, Utilities, Banking, Financial Services, Health-Care, Pharmaceuticals, Construction, Engineering, oil and energy industries. Regions rather and countries, Euros or Yen rather than US Dollars. At first sight these option may seem to add to the confusion rather than adding clarity. Yet most people had no real difficulty in identifying that long distance travel, would move toward the airplane rather than boat or train. Technologies drive innovation, innovation drive economies, young people, become adults, adults become parents, parents become families, families need bigger houses to house bigger children, children go to university and leave their homes, they marry, begin a family and the whole cycle continues.

In short, there are defined logical processes taking place within certain periods and different countries, for example, one regions may have a young population another an aging one. The former, need new houses, education needs etc., the latter retirement homes and end of life healthcare services. As this process never stops a commonsense spread will address the long term opportunities of both. If this spread is further predicated to your risk tolerance then you will by definition via logic and belief, construct a Portfolio profile pretty much in line with your knowledge base which is specifically geared to your needs and philosophy. You are therefore less likely to be at the behest of short term trends and transient fads, and emotions will have little opportunity to play their silly games.

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