Help! My investments are losing money
I'm often asked the following: "My investments are losing money. Should I wait till it comes back or sell now?"
This is a question that all investors will face at some time in their investing life and one that we all want a clear answer to.
So, do you sell? Or do you hold? I hate to say this, but it depends.
Firstly, you need to think about the quality of your portfolio; how diversified your portfolio is, and where your money (and your risk) resides.
When you are assessing your portfolio here are the key questions you need to consider:
Are you invested in safe or secure bonds?
● What kind of bonds are these? Remember, bonds are debt that pay a fixed income.
● Are they government bonds or corporate bonds? If you are invested in corporate bonds and they are losing money, you may have taken on more risk than you bargained for. I would seriously consider moving into government bonds as these are much safer.
Even better, you might want to think about investing in government bonds from other countries. This is a great diversification and safety strategy.
When you invest outside of your country, you give yourself a buffer from the local economy that you are already heavily invested in thanks to your income, savings, banking arrangements and currency. When the local economy goes down, all your investments go down at the same time. As other countries have different economic cycles, having a diverse portfolio may provide some stability if there is a downturn in the economy where you live.
Are you invested in stocks?
● Are they single stocks or an index of stocks? In other words, have you made a bet on a company (single stocks), or have you made a bet on an entire sector or economy of which the index represents.
The reality is, if you have invested in a single stock you have taken a much greater risk. The average life of a stock or company is approximately 4.5 years. Some companies like Apple last longer and prosper, but others, like Nokia, might fly high then disappear.
When you think about stocks, you have to remember that you have no influence over the company: you can’t even tell the CFO to pull his socks up! This means you are much closer to being a speculator (someone who just takes advantage of short-term market fluctuations, rather than someone who invests in the long-term health of a company: read this blog to find out more) than you probably realise.
Invest in what you know. If you have invested in a company that you don’t know too well and you don’t how it makes its money, you may need to reassess your investment portfolio - especially if your stocks are losing money. I would seriously recommend investing in an index.
You might be invested in a fund which seems to have gone down.
Well then my question is, what does the fund invest in? You’d be amazed how many investors don’t know: I had a friend who was invested heavily in a managed fund without knowing that it was heavily invested in condoms! Why? Who knows.
While we’re on the topic,
here’s another question I often receive: Sometimes I hear on the news that certain events have affected the stock market. What does this mean?
Stocks, like people, are affected by both external and internal factors. These are often referred to as intrinsic or extrinsic factors. Understanding the impact these factors have on stocks is critical.
If there is an external shock, (perhaps a war breaks out, or there is a change to the political landscape - for example Brexit) your stocks and overall position will be impacted. In many cases the extrinsic factors will move the value of your stocks down.
But if your portfolio moves down and there are no external factors which may have affected its performance, then the drop is likely to be the result of internal factors. Perhaps your investment manager invested in Nokia just before the iPhone was released, or maybe they invested in BHP just before the commodity markets tanked.
I would suggest you find out what is happening quickly, because if it’s an internal factor it can be time-critical to evaluate your portfolio and take the appropriate action.
On the other hand, if the news or factors are external, which they usually are, it is generally a sign to keep calm and do some research while you wait.
During the largest stock market crash in history, in October 1987, the dow lost 22.6% of its value. But within a very short period of time it was back to the same position.
There are many reasons why your investments go up and down. Understanding the drivers is incredibly important. If you don’t, you will leave yourself exposed.