Last update: 24-Jul-2014 9:53 pm
Thursday, July 24, 2014
Trinidad & Tobago Guardian Online
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The investment skill set
Thus far in this series on Managing your Money, we have concentrated on several themes for the T&T investor. They include, inter alia, the critical notion of NOT having all your eggs in one basket, otherwise known in the investment jargon as diversification, and building an investment mindset that takes an active approach to pursuing expansion of your wealth.
Today, I wanted to focus on the investment skill sets that would be necessary for building a portfolio to your best fitted benefit. Notice I stipulated “best fit” since your investment mindset will, among other things, set the framework for what type of risks you would be willing to take in order to achieve specific returns. Whatever your mindset, whether as a conservative or aggressive investor, certain investment skills would be critical to the achievement of your goals. The key question then is how do you acquire or access these skill sets.
Over some 30 years in investment management, I have been fortunate to come into contact with very successful people in their profession or particular line of business. Most of them have the ability to learn the key concepts of investing in a portfolio of financial assets. Unfortunately, in virtually all cases, they do not have the time nor financial professional staff support to evaluate, on a day to day basis, the changes that are taking place with the broad range of investments which they would be required to monitor.
To be successful, you need to be able to constantly monitor. Beyond just monitoring, you must be able to make the changes to your investment portfolio in a timely manner. This really boils down to expeditious execution of transactions to be made. How many times have I heard from even seasoned investor stories of missed opportunity, having made the right call to buy or sell, that they just did not get around to doing it. They were caught up in their substantive primary work and lost the investment opportunity.
What then is the alternative? It would be to establish a relationship with a reputable, trusted, longstanding investment advisor not just for securities selection and timely divestment but also for the allocation of your portfolio. Let us first explore asset allocation and address, secondly, security/investment selection.
Simply put, asset allocation is the determination of the mix of your investment portfolio. What proportion of your portfolio would comprise equities, bonds, money markets instruments, property related tradable securities and so on. Your target allocation may not be accomplished in one fell swoop.
As you start, your portfolio composition may be lopsided, especially in an equity market such Trinidad where there may be time delays in accessing sought after securities because of poor liquidity. The same is true for access to local government bonds.
World pundits have opined that proper asset allocation contributes more than 90 per cent of value added in your investment portfolio. It is far more important to generating consistent, positive returns than any singular stock selection. Of course this is based upon well developed, efficient markets—which T&T is not at this time.
For you as a TT investor, allocation must also go beyond local asset classes viz. equities, bond and ‘money market’ instruments. I have had to re-emphasize this in other places. Long gone are the days when we would receive seven per cent per annum or more on money market instruments. In our part of the world today, we are receiving 2.5 per cent on ten year Government bonds and roughly one per cent on money market instruments.
This is well below the rate of inflation which, at these the best of times, is in the order of five per cent. In other words, when you save at today’s interest rate matched against inflation, you are losing value on your money.
Allocation must extend to asset classes in currencies other than that of T&T. As a TT investor, it make little or no sense to have US dollar investment funds sitting in the local banking system earning in the vicinity of 0.25 per cent, when far better returns can be had, at the same or even better quality risk once you are willing to invest over a longer term horizon of 5-7 years. For those of you who do not have some part of your savings pool in hard currency, US dollars, it is time to start accumulating.
Once a decision has been made as to asset allocation, then comes the selection of securities/investments to flesh out your portfolio. This really should be the work of your investment advisor. For those who may be new to process, it may take some time to get accustomed to this approach to investing. But you already do some of this. For example, you may already consult with your stockbroking firm as to what are the best shares to buy or sell at this time.
Hence your investment advisor must be (I re-emphasize) trusted, reputable and longstanding. Do not let any fly by night operation—just come crawling out of the woodworks—manage your money. At some later stage in this series we can share some thoughts about the extent of discretion, if any, you may want to allow to the investment advisor and what form this would take. At a later stage also, we will be delving into far more detail on the securities selection process.
• Subhas Ramkhelawan is the Managing Director of Bourse Securities Limited.)