The TMR approach to stocks
QUESTION: It is so difficult now to make money in the stock market. Prices go up or down every day. If you were to invest in this kind of a stock market, what would be your strategy?—asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.
Answer: As I have quoted him in past articles, Jesse Livermore (considered to be the world’s greatest stock trader) once said that if there are ABCs in investing that you should follow, you should at the same time avoid the FGHIs. FGHI refers to fear, greed, hope and ignorance.
An example of fear is being afraid to invest when prices are falling. On the contrary, the best time to invest is when prices are cheap. Greed refers to refusing to sell when the going is good, even when the target return has been met or when stocks appear to be overbought. Hope refers to praying for a floundering stock to recover even when all the odds are against it. And ignorance pertains to investing in stocks with eyes and mind closed, listening perhaps only to tips.
Christine Lagarde, managing director for the International Monetary Fund, says that there is again an ongoing shift in global economics. Some of the risks are moving to emerging markets once more while the US begins to recover. Risks in Asia are highlighted by the shift of China from being an export-led economy to one that is consumer-driven. She warns that if such risks are not managed properly, there can be economic dislocations.
Return and risks are what drive stock markets. And with volatility in stock prices becoming more of the norm than the exception, it is only proper to apply a more appropriate strategy in investing. Some say this is the TMR strategy. TMR stands for take the money and run. The steps are deceivingly simple.
First, you need to determine what you are comfortable with in terms of annual return. Of course, the level of return will also equate to a level of risk that you are willing to take. So how do you determine that level of return? Here is where financial planning comes into the picture.
All of us have long-term goals. If you were to just quantify such goals and compare them with the funds you have to start with and the periodic amounts you can add within the time frame you want to achieve your goals, you can compute what amount of return you will need to make on your money.
Remember that the higher the return, the higher the risk. So if you are not comfortable with the resulting level of risk, lower your goals or increase the periodic additions to your funds. And if those do not work, be ready to level up on the risk you are willing to take.
Allocate your portfolio to determine how much you should be invested in stocks, bonds and money market. The exposure percentages will be determined by your assumptions on the expected return per asset category and the optimal percentage allocation to arrive at your weighted target return.
As to stocks, choose only those that have a better than average chance of meeting your target return for the asset category for the year. Once you hit that return, lock in your profits by selling and just keep the proceeds in money market instruments. Do not look back even if the stock moves higher in price; you have made your money already from that stock for the year.
If a stock’s price moves down and you still believe in the fundamentals of the underlying company and if you have new money to add to your portfolio, consider averaging down. On the other hand, if the loss is 10 percent or more in a year and fundamentals of the company you own have changed significantly, cut your losses by selling.
Whether it is in selling or buying, under TMR you take the money by locking in the profits or loss and running away from that stock for the balance of the year. In a way, TMR is the application of the FGHI rule of Livermore. But as earlier mentioned this is deceivingly simple because a lot of research has to be made in finding out the individual stocks to buy and the allocation within equities you will need to apply. So before jumping into TMR, you better study and practice portfolio management well.
If you want to know more about “laymanized” fund management, check out the free tools at www.personalfinance.ph. You can also attend our EnRich™ Wealth Creation and Preservation training or our Financial Planner’s Training program for the cities of Mandaluyong, Zamboanga, Baguio, Iloilo, Davao, Cagayan de Oro, Ormoc and Cebu. Check our website for the details.
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or emailed to [email protected]. To learn more personal financial planning, attend FREE personal finance talk on Oct 28 7pm at PSE Center. For more details, inquire at [email protected] or text <name><email><AFA> at 0917-9689774)
