Don’t lick your wounds too long

Question: 2018 has been a very bad year for my investments. Both stock and bond prices are down
locally. Even global investments are turning negative. There seems to be no place to hide. Should I sell first and just put my money in short-term time deposit placements, which of late have gone up in yields? —asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.

Answer: I will presume that you are investing for the long-term because, if you are not, you should have long protected your downside through various schemes; talking about your possible moves now would be too late.

Harry Markowitz, the father of modern portfolio theory, said people tend to hold not just one but a portfolio of investments. This is a way of insuring investments against possible losses. Though the insurance is not full proof, it does soften the blow from losses.

A long-term investment portfolio does not always mean that all of the underlying assets are tagged for long-term hold. A long-term portfolio will have the majority of its assets allocated for the long-term. But such a portfolio can also keep a small portion for short-term trading in the hopes of adding a “kicker” to returns. On top of everything, there could be a portion of the portfolio that is kept liquid to cover withdrawals and/or take advantage of dips in prices like what happened for the most of 2018.

If you had maintained a long-term portfolio such as the one mentioned above, you would have already been in short-term time deposits for the liquid portion of the portfolio where yields are now at least 6 percent a year for 90-day placements among the universal banks (i.e. they are slightly higher for commercial banks). You may also have kept the allocation for trading within the portfolio liquid and added that amount to short-term time deposits.

But, unless there is a fundamental change in macroeconomic variables or fundamentals of individual companies, the stocks of which you included in the long-term portion of your portfolio, you should have remained invested in such companies. In fact, you should be ready to jump right back in when opportunities arise (i.e. large divergence between stock prices and your intrinsic value computations) using your liquid assets. That is why you should not be licking your wounds too long.

As to bonds, a great strategy would be to match the maturity with your needs. This means that for the most part, your bonds will be held to maturity. So, while the market value of your bonds may fluctuate, you should not be affected as you are not going to sell those bonds prior to maturity. In the meantime, you should put together all of your coupon or interest earnings and reinvest them in placements where yields are very close to the yield to maturity you got on your bonds. That should be easy nowadays with the (expected to be short-lived) high short-term rates.

The Philippine economy has had fourteen quarters of uninterrupted growth with GDP registering at higher than 6 percent a year. And there are plenty of reasons to believe that the growth pattern will continue. This is not to say that there are no headwinds. But, so far, the positives outweigh the negatives.

And if you populate your portfolio with mostly the companies with solid fundamentals, whether they be index-component issues or second-liners, your portfolio returns should swing back to the positive column in no time.

As to your global investments, if you have any, the foregoing portfolio planning and allocation process applies as well. Just try to invest in foreign currency what you will spend in foreign currency to take away currency risk.

Bottom line is that you will really need to think about how you will run your portfolio instead of being reactionary to developments as they unfold. If you do, then you can be counted as a strong hand in the market, a person who is the man that is separated from the boys (as they say).

Happy investing.