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Investor discipline

Let’s not beat around the bush - whoever invests is in it to make money (clearly not to lose money).

Be it an investment in a money market instrument or a bank term deposit, a short term investment (in the form of a trade aimed at making a quick-buck) or a longer term one in nature (such as an investment in a collective investment scheme, bond or equity), preservation of capital and making money is at the forefront of any investment decision.

I cannot but highlight the importance of how imperative it is for an investor, both the seasoned as well as amateur type, to take informed decisions. To read, research, take an interest and most importantly take that initiative of knowing first and foremost where their own hard earned money is being invested but also learning about which factors could impact the value of their underlying investment.

It is important to get to know the key market forces, the way markets operate, ongoing global economic conditions, interest rates, growth rates, political and geopolitical events, understanding the operations of the individual companies where investor money is ‘put to work’ in (either via bonds, or equities or funds) as well as knowledge, on how to analyse company’s financial performance over a period of time.

All of these factors, amongst a flurry of other factors, both on a micro and a macro level, will, in one way or another, determine the value of an underlying investment.

In simple terms, a value of an investment is determined by the basic economic concept of demand and supply; inevitably all of the above factors impact the demand and supply of, for example a bond or an equity, so it is imperative to be aware of how market forces, when combined, can impact the price of an investment.

After getting a good grasp, the next thing an investor needs to have is build his/her own investment discipline. Easier said than done, especially when people’s money is involved.

Separating emotions from investment decisions is one of the hardest things to learn and achieve in this industry, but it is ultimately what distinguishes one investor from another.

Discipline can come in a number of forms, be it from sticking to investment horizons, patience, investing within an investor’s risk profile, but one of the most important types of market discipline comes in the form of knowing when to take a profit home. Even harder.

It’s when to know when to move away from an investment and take a painful loss, acknowledging that things might not have gone as originally planned, the ones which place invested capital at risk.

And discipline can only be enforced if there is a well thought out plan in place, and that plan is strictly adhered to. Whether it is a short term trading position, or a longer term core holding within a portfolio, an investor needs to know a-priori what to expect from that investment, what returns are expected, what level of risk is undertaken, and the time horizon for that investment to reap its dividends.

Devise a plan. Set goals. Monitor your investments. Get to know what you are investing in (and where your money is). Analyse your exposures. Dissect the winners from the losers.

Monitor your portfolios and how external forces are impacting the overall value of your portfolio and whilst you are at it, revisit your plan. Challenge it, the criteria, and the assumptions that were built around the plan.

Are you overexposed to a company, sector, and country or asset class? Are things going as planned? Have your objectives been met or have they fallen short of expectations?  Have you set price targets and stop losses?

Where are your investments vis-a-vis those levels? What course of action do you intend taking if the value one of your investments goes above (or below) those levels and does it fit in with your original plan?

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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