If you’re a small guy in the investment arena, you can’t expect the lead manager of your mutual fund to pick up the phone and ring you up when stocks started tumbling. But at least you should have received a text message or email from the sales guy who made you sign on the dotted line, right?
From reader feedbacks INQUURER.net has been getting, it seems like most brokers, investment managers, bankers and sales agents have forgotten their clients in the midst of the market uncertainty. If you’re one of the few who received at least a group text message or email explaining what is happening, consider yourself lucky (and smart) for choosing the right company. Otherwise, you’re just like the rest of the small guys who are left holding the bag.
From a macro perspective, this can be alarming. Many mutual fund investors, for example, are first-timers attracted by the fantastic returns the industry reported last year. Worse, if they were enticed to invest to chase those returns, they are probably the ones now making a beeline towards the exit.
In his column today, Noet Ravalo calls this a sad commentary about our financial market. “Investor-level education and awareness remains wanting in many respects. Many savers who have crossed their bridge and became ‘investors’ feel left out after making the investment,” he says.
Why is it that we will make time and effort to call the store that sold us a defective mobile phone or television set, but think twice before calling the agent or broker? Oh, I would burn the wires complaining to anyone unlucky enough to answer the store’s phone! But come to think of it, I haven’t even called my agent yet and no, I haven’t heard from her or the mutual fund company I invested in. Think I should shift?
Noet also makes another interesting point: knowing when to say enough is enough.
Investing is not only about figuring out one’s risk profile and the corresponding suitable products. It is also about knowing when to say “when”. In the jargon of the market, we need to set our stop-loss limit in advance. This is the maximum loss we take at which point we pull out of our investments.
Remember Leo? He did this quite well. He made the call. I’m sure it was tough, but that allowed him to sleep well at night. Just worrying didn’t make sense for him. He made a choice.
What I’m learning quickly from MoneySmarts is that investing decisions are very, very personal. Only the person making the choice will know if he made a good call or not. We’re all afraid of making mistakes and losing money. I don’t think there’s a single wealthy person on earth who made money in business and investing who has NEVER lost money in the market. In fact, those who have paid some very expensive tuition are sometimes those who in the end bring home the bacon.
Noet recommends setting a stop-loss limit in advance.
This limit needs to be agreed upon with your broker/financial manager. In fact, you should also set a limit as to how much paper gains you should accumulate before liquidating your position. Just as you protect yourself from further losses, you should also protect yourself from gains that may reverse if you don’t consolidate your position soon enough.
Food for thought worthy of dessert. 
August 31st, 2007 at 2:00 pm
There are 2 types of “investor.” The trader (short-term player) and the long-term investor (real investor). Stop loss/stop gain limits are trading techniques. Long-term investors don’t use that. They use fundementals and hold for 3 yrs. or longer.
Both trader and investor can make money in the stock market. In mature markets, investors beat traders. In emerging markets where prices are volatile, traders may have an edge over investors.
August 31st, 2007 at 12:56 am
follow up…got sidetracked earlier…posting a comment earlier in the day made me miss out on an attractive entry point for a stock i’ve been watching….aarrrgh!!!
anyway, @salve:
the flow of communication should be:
fund company (fund manager) to financial advisors and their dealers to their individual investors.
fund managers are way too busy to be calling individual investors to give them an update. thats the job of the financial advisor. on the flip side, if the FA has no update from the fund companies, they’re about as clueless as the investor : )
communication in this business is vital, more so during down markets when clients need the most hand-holding (memo to pinoy FAs!)
lastly, i’d like to continue commenting on noet’s advice this time on putting a cap on your potential gains in advance “protect yourself from gains that may reverse if you don’t consolidate your position soon enough”.
i respectfully say i consider that as really bad advice.
1st, why would an investor limit his upside potential? as an investor i’d want to make as much as i can, and not cash out say at 15-20% just because “i’m afraid i might lose all my gains…ok na sa kin ang 20%.”
2nd, fear of a market reversal is not a reason to take gains off the table. market movements are part of everyday life in this industry. its as natural as breathing. an investor embraces it, learns from it and makes money out of it.
a real investor takes money off the table when there’s no more money to be made, or when the expected return on the investment doesn’t warrant the risk of holding on to it. easier said than done, yes, but thats how fortunes are made.
for example, if you had 1000 shares of google and you were astute enough (or lucky enough) to have bought in when it was say $100 or even at $200. if you had set a personal limit to yourself to say sell everytime you made 50% gains, you would be crying your heart out every day for the rest of the time google stays in the $500 range haha.
if the investment is a solid one, why cash out early just because you’re afraid to lose it all?
cheers,
oda
August 30th, 2007 at 9:57 pm
The absence or lack of “after sales” service in RP is but another sign of the industry’s immaturity. I can tell you that within the first two days of the market tanking last Aug 16th, fund companies here in Canada have comments ready from each fund manager and financial advisors have a gazillion emails and conference calls to supply them with info to calm their excitable clients.
As for Noet Revalo’s “stop loss” and “limit the gains in advance” suggestion, I want to share these comments:
Personally, I view these strategies fit only for day-traders and speculators, not for long-term investors and certainly not for mutual fund investors. Been there, done that.
Simply, would a prudent investor sell a stock that got hammered say, in a week’s time by 30% because of either market volatility, hedge fund selling, etc. BUT without a real change in the company’s fundamentals and prospects just because your stop-loss criteria was to not lose more than say 20% of your invested capital?
I don’t know about you, but my answer is a resounding NO. In fact, I’ll add to my position! I’ll let the noise and the frenzied crowd go about their foolish ways because I know that when the dust settles, the market will realize the intrinsic value of the company is intact and bid the price back up.
Let me go further by illustrating the bear market in 1973, using the S&P 500. It’s a piece we use in our company and I thought you guys will find this very enlightening:
Value of $10,000 invested in the S&P 500 (US$) January 31, 1973:
3 Months Later…$9,285
6 Months Later…$9,465
9 Months Later…$9,545
12 Months Later…$8,587
1 Year, 9 Months Later…$5,816
AT WHAT POINT DO YOU THINK MOST INVESTORS WOULD HAVE GIVEN UP AND THROWN IN THE TOWEL?
What level would you have placed your “stop loss” limit?
If you had 2 options – invest in a fixed income instrument bearing 5% or stay invested in the same market that turned their $10,000 investment into a $5,816 investment, what would you have done?
With the 5% fixed income instrument:
6 Months Later…$5961
12 Months Later…$6110
2 Years Later…$6419
5 Years Later…$7445
10 Years Later…$9530
Stayed invested in the S&P 500:
6 Months Later…$7820
12 Months Later…$8033
2 Years Later…$10467
5 Years Later…$12595
10 Years Later…$24669
Stop loss strategies are valid, just not for your everyday mutual fund investor.
Hope this helps.
Oda
August 30th, 2007 at 5:38 pm
It is often said, people dont care how much you really know until they know how much you care. If you want to be successful in your business or profession you better be front and center when a client needs something from you. Information, a personal greeting, even trivia is important if you are serious with relationships. Lest I pontificate, it simply is love the job and love the client, fame and fortune are just natural results if you do things right. Great article Salve. Cheers!
August 30th, 2007 at 3:21 pm
after sales service is a rare gem in this country
almost all of them are like that