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Throwing Caution to the Wind
Sunday 23, September 2018

Throwing Caution to the Wind

YaniqueF

If you have read even a few of the Sterling reports, you would recognize that we advocate a balanced portfolio, with the emphasis on high quality bonds to shore up your income needs.  But what about the high fliers?  Is there a place for you?  You know yourself- if the investment is not risky you don’t want it!  You only trade U.S. equities and listen with envy when your other friends boast about their trading successes.  You are up to date on all the crazy things going on with cryptocurrencies.   This article is for you Mr./Mrs. risk taker!

Firstly, be very careful how you believe all that you hear from your friends and colleagues.  So, your friend has doubled their money in two months, and based on this trend they are going to be filthy rich.   But why aren’t they rich yet?  Well, let’s face it, everybody boasts about their successes.  They may not only be boasting but may also be making minor (sometimes major) exaggerations about their accomplishments!  I have seen it time and time again that when people start to make losses, you don’t hear anything.  Eventually they simply stop trading.   I have said all of this to make certain that you take what you hear with a grain of salt.

How much winning is enough?

 I have several friends who are trading U.S. equities right now, and they are doing very well.  However, the recurring question is: when do you sell and take your profits/gains?  This is important because a stock that you bought at US$25 which has risen to US$28 leaves you with a dilemma.  Do you sell now or wait to see if it goes up further?  Of course, once you sell, watching it rise even higher leaves you with seller’s remorse.  Yes, there are tears, but aren’t there more tears when the price starts to go down?  The truth is, without a working crystal ball, you don’t know the direction it will take.  The tried and true strategy is to set your target profit.  So, if your profit target is 20% on your investment, you bought the stock at US$25.00, you should sell at US$30.00.

Now that you have been disciplined and sold at US$30.00 what is your next move?  Most of my friends would choose to go back into the same stock and buy at US$30.00.  At this point, you have increased your risk.   You are entering at a higher price, and the only way you will be successful is if the price continues to increase.   Will it?  Who knows.  This is why, most investors would put back only their “winnings” into this trade and not their principal.

Why volatility is your friend. 

One of the stocks that my friends like the most is fundamentally pretty bad.  What I mean is that the company is making some serious losses and may or may not improve.  On paper, it is not the type of stock one would run to.  However, the stock’s price moves up and down pretty consistently.  All this means is that you can buy then sell then rinse and repeat and constantly make money.   Of course, this only works as long as the stock price is “volatile”, this strategy makes no sense with a stock that is basically stuck at one price.

In summary, high risk investing is very exciting.  The thrill is very similar to a roller-coaster ride but  it is not for everyone.  Abiding by investing rules is still critical.  Establish the criteria for your stock selection, whether it is stocks you are familiar with, or stocks whose prices move up and down.  Acknowledge that you will have to be checking it constantly throughout each day.  In addition, establish your limits from the onset.  How much profit you want and how much in losses you are prepared to take.  There are stocks that may never go back up in value.  Make certain that you don’t lose your shirt.  And if it is your only shirt, please don’t invest it!

 

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

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