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Honing your investment mindset

Wednesday, February 26, 2014
Managing Your Money

Last week, I began this series discussing the difference between saving and investing... saving as passive and investing as active. We considered the changing investment landscape and its impact on local investors, encouraging them to look beyond traditional bank deposits and money market funds; to look at new asset classes; to invest in currencies that are not only TT dollars. 


This week, we look at how you can adjust your mindset to become more investment oriented. Even with the pursuit of an active approach, you will have to be focused on the measure of risk you want to take for the quantum of returns you want to realise. Ultimately the investment mindset is about taking the decision to be active and to stick with a game plan.


The ideal investment mindset, in my respectful view, is akin to that of a quality batsman. But how exactly does this batsman think? What drives his decision making, stance, aggression and shot selection? As I see it, the batsman focuses intently on two critical factors: the target score and the batting conditions. Let’s take this batting analogy into the realm of investment.



Setting your Innings Target
At the very outset, any quality batsman has a minimum score which he would like to achieve within a time span. There is always some figure at the back of a batsman’s mind, which he is in pursuit of, regardless of circumstances. In a similar fashion, we as investors should have some minimum threshold of financial independence we would like to arrive at over a certain time period.



The question ‘What’s your number?’ refers to the level of wealth you would want to accumulate at some future date.  This is a commonplace way of gauging your financial goal.


In arriving at your number, lifestyle elements such as living expenses and major one-off expenditures should be considered. Whatever your number turns out to be, it will have an impact on how you go about structuring your innings aka investment portfolio. However long they may be, all innings are finite, and a higher innings score aka portfolio value requires a higher run rate (required return on investment). A higher run rate, in turn, means more aggressive batting…making riskier investments.


Time is an investor’s (and batsman’s) friend. The power of compounding over time allows investors to achieve their goals while taking more measured risks. In the same way, a test batsman has more flexibility in pacing his innings, as opposed to a 50-over or T20 specialist. 


The chart above gives an idea of the benefit of investing versus saving. For example, if an investor were to place annual savings of TT$10,000 per year into a bank account over the period 2009 to 2013 at the average prevailing savings rate of 1.9 per cent, he/she would have accumulated just under $53,000 in wealth.



In comparison, a similar annual investment in a portfolio of stocks (in our example the Trinidad and Tobago Composite Index), at an average of 7.5 per cent, would have left the investor with over $62,000 in accumulated wealth over the same time period.   In other words, saving alone would have accumulated $3,000 or so over the period, whereas investing would have earned you around $12,000 in returns.



For a $100,000 savings level per year you would accumulated net gains of $30,000 for savings versus $120,000 in the representative local stock market portfolio. (Source: Bourse)


Assessing the Field
In getting to triple figures, the consistently good batsman is well-versed in assessing the playing field to take advantage of batting conditions. Investors must be able to read the investing environment and take decisive actions to capitalize on opportunities as they present themselves. An investment plan, like any game plan, should be flexible and responsive to the changing environment.



On the field, changing pitch conditions, different bowlers and field settings all influence the batsman’s shot selection and caution/aggression. Similarly, opportunities and changing economic/financial market conditions should encourage investors to adapt and benefit.


In challenging conditions, the key to success is often keeping your wicket. If conditions are tricky, you may have to settle for singles and exercise patience. However, even in poor conditions, opportunities will arise where the batsman can take advantage of poor bowling, hitting a few boundaries. Using this example in an investing context, the investor should concentrate on building a solid, well balanced portfolio, while being able to spot and capitalize on selective high-return, lower-risk investment.


 In the same way that a batsman does not help the scoreline by blocking every delivery faced, if you continue to save rather than invest, you are not improving your financial situation with the current inflation rate above the best saving rate available. Ultimately, the amount of runs a batsman scores—or the amount of wealth you accumulate—over a specified timeframe will depend on the level of risk undertaken and the potential return to be derived therefrom.


 Next week, we will discuss the investment skill set necessary for you to be an active investor.



Subhas Ramkhelawan is the managing director of Bourse Securities Limited.


This document has been prepared by Bourse Securities Limited, (“Bourse”), for information purposes only.



Any trade in securities recommended herein is done subject to the fact that Bourse, its subsidiaries and/or affiliates have or may have specific or potential conflicts of interest in respect of the security or the issuer of the security, including those arising from (i) trading or dealing in certain securities and acting as an investment advisor; (ii) holding of securities of the issuer as beneficial owner; (iii) having benefitted, benefitting or to benefit from compensation arrangements; (iv) acting as underwriter in any distribution of securities of the issuer in the three years immediately preceding this document; or (v) having direct or indirect financial or other interest in the security or the issuer of the security.



Investors are advised accordingly. Neither Bourse nor any of its subsidiaries, affiliates directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses arising from the use of this document or its contents or reliance on the information contained herein.



Bourse does not guarantee the accuracy or completeness of the information in this document, which may have been obtained from or is based upon trade and statistical services or other third party sources. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.


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