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Diary Of A Private Investor: How To Be A Master Of Our Share Portfolios

You may sometimes hear analysts say that investors are more interested in a return of their money rather than a return on their money. It seems like an innocuous enough throwaway quip.

But the switching of the seemingly harmless prepositions “of” and “on” can send shivers down the spines of many investors. It can make us question whether it is a good idea to invest in risk assets such as shares when markets are as volatile as they have been in recent months. Perhaps it might be better to stick with cash.

Investing at the moment can be even more troubling when the market is so obviously divided about the outlook for the global economy. There are good reasons for the division – the world is facing unprecedented economic difficulties and heightened health concerns. And frustratingly for many investors, we are already six months into the outbreak of COVID-19.

But we are still no clearer about when the life-changing pandemic will end. Perhaps we may never see the day when health professionals will signal the “all clear”. Maybe we will just have to learn to live with the deadly pathogen.

Confetti money

But that does not mean we should stop investing. If anything, it could mean that we must invest even more to ensure that our savings maintain their buying power. Let us not forget that central banks have opened the money-taps and scatter cash around the global economy like confetti….

…. The rights and the wrongs of doing so is a debate for economists. Our job is to invest based on what we know.

Worryingly for everyone, the world still has not fully recovered from the first bout of money-printing during the Great Financial Crisis. That was when more than US$9 trillion was pumped into the global economy by the four big central banks.

This time, those banks have magicked even more cash from thin air. It is unfathomable how our savings can hold onto their value when so much more cash has been put into circulation.

The upshot is that we need to invest our money into assets that can not only hold their value but see its buying power rise over time. There are very few assets that can do that consistently.

A notable exception is the stock market. But there are obviously risks we need to consider when buying shares. Share prices can go down as well as go up. Consequently, it is important to use the rights metrics to determine whether we are investing our money correctly.

Misleading indicators

A popular measure is share prices. They are, perhaps, the easiest data to use. That is because we have been conditioned that way. They are also readily available. So, when share prices rise, then that must surely be a good thing. Right?….

…. And when share prices fall, then that must, by inference, be bad. Right? But that is the wrong way to measure success.

Share prices can be misleading because they reflect market sentiment. And who knows how people might feel about risk assets, such as shares, at any moment in time.

Warren Buffett said: “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable”. So, why would we ever want to measure our success as an investor based on something that depends on how other people might feel?

A better way, particularly for income investors, is to measure the quantity of dividends generated from our portfolios. If we build a carefully-balanced collection of shares that can generate progressively more dividends over time, then measuring the income produced can be a more reliable gauge.

Cruise control

Around two years ago, I built a model portfolio of 20 shares. Over the 24 months, they have produced a regular stream of monthly income. In some months, the portfolio might generate more, and in other months it might generate less.

But over every rolling 12-month period, which is a more reliable gauge, the income generated has crept progressively higher. That is a better way to determine whether the right shares have been put into the portfolio.

Albert Einstein reportedly said: “Not everything that can be counted counts, and not everything that counts can be counted.” So, to be a master of our portfolios, we need to measure the right things and ascertain the things that we can regulate.

We cannot control share prices. But we can control the shares that we put into our portfolios. So, focus on buying the right shares, and develop a disciplined approach that can help to block out our own distress signals….

…. If you can do that, you will master your portfolio. If you cannot, you will be just another slave to the vagaries of the market.

A version of this article first appeared in The Business Times.