You open your investment statement. One investment is up 18%, while another is down 6%. You may feel tempted to sell the one that is down and buy more of the one that is up. It can seem like a logical move, but acting on that instinct can be costly.
The issue may not be the numbers themselves. It may be what you are comparing them with. When you judge investments on performance alone, you risk letting emotion, rather than purpose, drive your decisions.
Performance is only part of the story
To assess an investment fairly, consider what type of asset it is and why you bought it.
If you invested for growth, compare its performance with other growth investments. If you invested for reliable income, consider whether it is still providing that income. The right measure depends on the job you expect the investment to do.
A South African example: the government bond
A few years ago, many South African investors moved into government bonds because yields were attractive while bank deposit rates were low.
Then interest rates rose. When rates rise, the market value of existing bonds falls. Some investors saw a lower value on their statements and concluded that the bond was a poor investment.
Before reacting, consider what the bond was bought to do:
- The coupon has not changed. The bond continues to pay the income promised when it was issued.
- The maturity value has not changed. If the investor holds it to maturity, the government repays the full capital.
- The bond still serves its purpose. It continues to provide predictable income and a predictable return.
The change in market value remains on paper until the investor sells. Selling at that point locks in the loss and means giving up future income. If the investor bought the bond for income, staying invested may be more appropriate than reacting to the lower value alone.
The same issue can arise within a share portfolio
Comparing shares on performance alone tells you little. Different shares respond to different factors.
|
Share type |
What influences it |
Why you may hold it |
|
Cyclical shares, such as mining and resources |
Commodity cycles, global demand |
Growth when the cycle turns in its favour |
|
Energy and oil-linked shares |
Oil prices, geopolitics, wars |
Exposure to energy markets |
|
Banks and financial shares |
Interest rates, the local economy |
Earnings linked to domestic activity |
|
Blue-chip dividend payers |
Steady, established earnings |
Consistent dividends over many years |
A conflict that pushes up oil prices may lift energy shares while having little effect on banks. That does not make a bank a poor investment. A blue-chip share may not grow as quickly as the market’s current favourite, but it may have paid a consistent dividend for years. If that was why you bought it, consider whether it is still meeting that goal.
The cost of chasing recent winners
If you keep selling investments that lag and buying those that lead, your portfolio may end up concentrated in recent winners. They may all be responding to similar factors.
That can feel rewarding while conditions support those investments. But if conditions change, several holdings may fall at the same time. The investments that seemed less exciting may have helped diversify your portfolio and cushion it during that period.
Questions to ask before you decide
- Why did I buy this investment? Was it for income, growth, capital protection or diversification?
- Is it still doing that job? Is it still paying the income I expected? Is the business still sound?
- Am I comparing similar investments? Compare a bond with other income investments and a bank share with other banks, rather than with the year’s top performer.
- What is driving the change? Is it a commodity cycle, interest rates or a problem with the investment itself?
- What would selling change in my portfolio? Would I lose diversification I need?
If an investment is still doing what you bought it for, a disappointing figure may not be a reason to sell.
Understand what each investment is doing
Good investment decisions start with more than a headline performance figure. Your financial adviser can help you understand how each investment fits your plan, whether you are investing for retirement, estate planning or tax efficiency. Your portfolio manager can explain what the portfolio holds and what is driving each investment. Before you act on a change in value, speak to both of them.
The next time you review your statement, consider how each investment is contributing to your plan and the goals you’re working towards.
Visit momentumsecurities.co.za to learn more.
Disclaimer: This article does not constitute financial advice. Please consult one of our qualified portfolio managers before investing in any product.
Momentum Securities (Pty) Limited is an authorised financial services and credit provider. Registration number: 1974/000041/07 / A member of the JSE Ltd / FSP license number 29547 / NCR CP 2518.
