Ideas & Debate

Giving in to fear could be investors’ undoing

investors briefing in Nairobi
Guests during an investors briefing in Nairobi. FILE PHOTO | NMG 

Shares are red, investors are blue, losses are up and that is true. Once a red hot market is now chilly as the weather in June. Equities (as represented by the All Share index) are down some 3 per cent since May and about 10 per cent since April. Previous support lines are getting tested.

Fear of further losses is growing. Everyone is wondering whether the 14-month bull party is finally over. Questions abound on the next phase; is it a temporary correction or the beginning of an end?

Do we need to be cautious or optimistic? Have the bears finally overpowered the bulls or does the rally still have the staying power?

These concerns are real. But before the sceptics begin sounding the alarm let’s ponder on a few thoughts (three P’s) during these turbulent times. This may sound like a broken record but it’s crucial to your investment success.

The first P is Perspective. Although daunting array of economic challenges remain, there are plenty of reasons to keep the investor hopeful; growth continues to strengthen as shown by recent Purchasing Managers Index (PMI) readings, inflation is still relatively subdued meaning that this is still a decent environment for corporate earnings growth, narrowing current deficit and growing remittances are keeping the Shilling strong and stable, and so on.

Technically, the All Share Index trading 2.5 per cent and 8.1 per cent above its 50-day and 100-day Exponential Moving Averages (EMA) is a clear sign that bulls are still in control.

However, if one assesses the economy differently, then this may be the time to make some portfolio adjustments.

The second P is Psychology. It’s true that many have the “nose for opportunity” but few have the “stomach for risk”.

Often times, portfolio losses breed self-doubt and worry.

This need not be the case. In times like these, it’s always best to train and remind oneself of the virtue of patience. However, if you find the markets too “edgy”, one does not commit sin by taking a break – liquidating your holdings – and sitting on the side-lines.

It’s better to have peace of mind, than stress out about your fluctuating net worth. Interestingly, times like these remind us why markets favour the emotionally strong (not necessarily the intelligent).

The third P is the Plan. Sticking with the main plan is probably the most important thing an investor can do in a “choppy” environment.

Giving in to fear jeopardises its eventual fruition. That said. Increasing volatility presents an opportunity to “groom” or add onto your stronger positions.

For more dynamic investors, this may be a perfect time to cull losers (resulting from earlier ill-disciplined positioning) to plough back into your winning bets.

But overall, whatever tactical adjustments made, they should all be about reinforcing the main plan: Nothing short of this standard.

In closing, as the market flirts with the ‘devil’, it’s good to remember that it’s the “giving into temptation” that we should be worried about. Until then, we’re safe. But again, investors are cut differently. Not all will be comfortable with the current conditions.