ONE would be tempted to think that the title of this most recent submission (and this writer’s first in the capacity of Manager, Corporate Solutions & Wealth Management) was inspired by the song penned by Nasir Jones off his ‘Greatest Hits’ album. In reality, it was prompted by many clients and curious parties alike who asked the common question of ‘what should I do with my money?’
The easy answer in a pre-JDX (Jamaica Debt Exchange) environment would have been to place it on REPO (repurchase agreement) and let the returns exceeding 10 per cent accumulate over time. This would then be supplemented by directing said person to the closest beach to get acquainted with a Mai Tai, designer sunglasses and a beach chair. In fairness, however, the implications have taken on much graver meaning, for markets have become more turbulent as investors seek new homes for capital.While the purpose of this submission is not to share a specific answer, it will draw attention to two primary means of surviving the times that have surfaced. In times of war, one is either on the defensive or offensive. There are relative middle grounds, but the fact remains that one is either inherently positioned to defend or attack. Since the capital markets are now a battlefield (if you have doubts, please look at a Google Finance screen during a day of rampant [downward] speculation and see red, which denotes capital losses and admit that a bloodbath doesn’t come to mind!) these two strategies/outlooks apply perfectly.While in one’s personal life, a counterpart going on the defensive may not elicit positive thoughts, there has been proven to be value in one’s going defensive in the capital markets on occasion. This may raise the question of ‘what does a defensive stance look like?’ Usually, investors in a defensive position tend to react negatively/conservatively to movements in the markets by liquidating their investments and holding cash, or investing in fixed-income securities in the pursuit of ‘safety’. If said investor were to invest in equities, it would usually be in the most conservative of holdings.While this is neither a good nor a bad thing, timing is of the greatest importance. Looking on past instances of successful deployment of the defensive strategy, it has proven to be most effective when prices in the market are rising aggressively, and the person in question was perhaps in ‘attack mode’ previously and now seeks to profitably exit the current position and shift from the pursuit of capital gains towards preservation. An instance that comes to mind is Q3 to Q4 2012 in the fixed-income markets overseas.Conversely, as with every competitive endeavour, attack is an important variable as oftentimes, while defence serves the purpose of preservation and stability, the matchup is determined in the attacking sphere. Applying this to today’s capital markets would be to envision risk-tolerant individuals consistently and continually deploying cash towards buying and oftentimes holding high-quality instruments whilst looking to buy more on a fall in price. Similar to any efficient striker in the beautiful game of football, an aggressor in the capital markets usually waits for the perfect opportunity to pounce. Buying low and selling high is the ultimate objective.The inherent risks of each strategy are somewhat clear, as the defensive person runs the risk of missing opportunities because of the proclivity to hold cash and being trigger-shy in capitalising on investment instruments. Needless to say, relying solely on fixed income can lead to relative attrition of one’s principal, especially in this environment where the 10-year treasury rate in the USA has risen to its highest level in years and the Federal Reserve is pursuing economic stimuli and a two per cent inflation rate. Accordingly, the aggressive, attack-minded investor may occasionally experience capital losses were the price of their holding to fall and may have liquidity challenges if their capital is aggressively deployed without provision being made for unforeseen needs/circumstances.To conclude, there is no real answer to the question, as investments aren’t one size fits all and the shoe has to fit for someone to wear it; is the hope. Secondly however, when the potential pitfalls are considered, it is clear that balance is required to suitably adjust to the scenarios at hand. Note that while defensive positioning has its benefits, it also bears perils for the recent scenario in Cyprus where bank account principals were taxed (circa 10 per cent) would force one to give a second thought to going overweight in savings instruments.Needless to say, one should have a lengthy meeting with a trusted, established and performance-driven investment advisor ahead of executing a survival strategy.Finally, the situation is best illustrated by the responses of two separate individuals in February of this year. At US$10,000 the principal sums were the same, and both approached their advisor with a cheque and asked for the necessary advice. Investor number one opted to place the funds on repo, while Investor number two believed that the 3.5 per cent per annum repo rate was insufficient to grow the principal and pay down on a new premium motor vehicle. With that in mind, Investor number two bought Diageo (DEO) at US$119 and Nike (NKE) at US$53.70. Today, Investor number one has a principal of US$10,065, while Investor number two has US$11,607 – growth of 16.07 per cent in six months. The moral of the story is that while both may be happy in the pursuit of wins, it can (literally) pay to attack.Survive the drought. I wish you well!Ryan Strachan is the Manager, Corporate Solutions & Wealth Management at Stocks & Securities Limited and may be contacted via rstrachan@sslinvest.com.Buying shares in Nike and Diageo six months ago would have given an investor greater returns than investing in repos.View the original article here
Surviving the times
