World Investor Week 2022: Five simple ways to build investing resilience

The World Investor Week 2022 is here again; a week-long global campaign promoted by International Organization of Securities Commissions (IOSCO) to raise awareness about the importance of investor education and protection.

This year, one of the key messages is based on the theme of investor resilience and given all we have been through in the past two years, I feel it’s just about time. In this article, I will discuss on 5 simple ways one can use to build investing resilience.

Understanding Resilience

Have you ever wondered why you put up with the stresses of your workplace? I mean, you deal with quite a lot from difficult work-mates who don’t send emails on time to stubborn clients who want to tell you how your job should be done to even the annoying group of men wolf whistling at you as you walk down the street. Why is it that you convince yourself to wake up at 5AM every morning and allow yourself to get back to bed at 11PM five days a week? Simple: the reward.

The reward you are expecting to receive at the end of those twenty something days will make it all worthwhile as you believe you will receive fair compensation for it. You soldier through those obstacles to reach your end goal and that is what resilience is all about.

Simply defined, resilience is the ability to recover from a difficult condition. It can also be related to being flexible in difficult situations in order to achieve something greater. Some could say that it is an exercise in crisis management. When applied in the investing context, resilience involves the ability to be flexible with one’s investment plans in the short term in order to thrive in the long run as well as ensuring the safety of one’s capital.

The Enemies of Progress

We have been through a lot these past two years; from a disease that wiped away millions and stopped billions from simply freely moving from one place to another (thus completely disrupting the way, we do business), to witnessing a whole country being invaded by another (continuing to disrupt global supply chains and increase the general cost of doing business).

These are examples of events out of our hands which greatly affect our lives as well as our investments. As these are events out of our control, they are referred to as the “external threats” to resilience. The other enemy comes from within our control and so is known as internal threats to resilience.

External – events beyond an investor’s control

These are normally macroeconomic and may affect the whole economy or an industry of the economy. We have already seen examples of these and the damage they are capable of.

Internal – events within an investor’s control

These threats happen when investors sabotage their own plans by making mistakes such as holding narrow portfolios – one overly exposed to a single company, or a single asset class – and even by being ignorant of news related to their investment. Business owners may also face these threats by doing things such as mismanaging inventory levels or over-investing in a new business line.

Mistakes We (Sometimes) Make

When it comes to building investing resilience, there are a few ways we unknowingly sabotage ourselves. I will expand on just five ways we do so.

Not knowing our personal risk appetites

Your risk appetite is something that only you can know and is actually one of the first things you must consider before investing. This comes in handy when you are figuring out where to invest your money because of the nature of different vehicles.

• Investors generally fall into one of three categories when considering risk: risk averse, risk neutral or risk loving. Treasury bonds are relatively low-risk, so more risk averse investors prefer them; stocks are relatively high-risk so more risk loving investors prefer investing in them; a risk neutral investor would go for an equal mix of high and low-risk investments or even moderate-risk investments.
• It becomes very easy for us to fall prey to situations such as panic selling when markets get shaky if we do not first know our risk preferences. This is because we can easily choose the wrong type of investment, thus creating a feeling of discomfort very early in our investment journey. Remember that part of being resilient involves feeling comfortable first with where you have placed your money.

Not having an investment plan

• The other mistake we tend to make is not having an investment plan. Plans are what keep us on track they guide and alert us in case we are falling short.
• The problem with not having an investment plan is that you will continuously be driven by all sorts of market news in making your investment decisions, which can easily lead to negative returns.

Not diversifying enough

• By keeping all your eggs in a particular asset, you are making it very easy for your money to disappear if something happens. Let me demonstrate with a simple example: assume you are a stock investor that only invests in manufacturing industries and the government releases a regulation stating all listed manufacturing companies are not permitted to pay dividends to shareholders for a set period of 5 years. The reason is to encourage reinvestment of profits for the formation of bigger industries in the country. Now you are at risk of not receiving any income (as dividends) from your investment. This highlights how dangerous it can be to not spread out one’s funds into different investment vehicles, and can really affect our long-term progress.

Ignoring our liquidity needs

• One of the things that puts us at ease with our investments is knowing that we can, at any time we need, withdraw and get our cash. It can really be discouraging to us to keep investing if when we need to withdraw our money, we are denied of that. That is precisely why we need to have some investments in liquid vehicles (as well as holding adequate cash itself) as it keeps us moving forward with our investment plan no matter the situation.

Not keeping updated with investments or potential investments

• Now, be honest, would you buy a plot of land in Kigamboni and not check on it at least once a month? Realistically, this is not the case for most Tanzanians I have met but why is this culture lacking in investments made in the capital markets?
• Keeping updated is really important when building investing resilience as it allows for us to continuously review and rethink our plans. It is a form or reassurance that we are on track.

Building Resilience

If you feel you have made some of these mistakes, don’t fret. Now we can work our way towards fixing the situation because it is never too late to learn from your mistakes. Here are 5 simple ways to build stronger investing resilience.

Discover your risk appetite

 Knowing your risk appetite helps you in picking the right assets, thus putting your mind at ease amidst market fluctuations. Keeping your money in the right place (for you) actually encourages you to keep investing, thus building on your resilience.

Create an investment plan

-Investment plans detail all aspects of your investment journey such as the type of investments you will be making, your return benchmark, your financial goals, your investment time horizon, the balance of your portfolio, etc. Plans which we regularly review help us keep our eyes on the prize thus building investing resilience.

Diversify more

• Smart stock investors protect their precious portfolios throughout the various stages of the economic cycle by investing in stocks from different sectors in the economy. This means investing in stocks which are negatively correlated – when the prices of one falls, the other remains unaffected to some degree.
• Bank stocks like CRDB and NMB may rise with accommodating lending regulations, while manufacturing stocks like TPCC and TBL may rise with lower global oil prices (resulting in a reduction of production costs) etc.
• With diversification, stock investors can very well protect themselves against bear markets, while boosting their investing resilience as they are also put at ease knowing that their risk has been spread out.
• It’s no secret that cash makes us feel more at ease, or at least knowing you have disposable cash available somewhere makes us feel at ease. Making sure your portfolio consists of enough liquid assets, including cash itself, is important as shocks can happen at any time (just think back to early 2020 when the pandemic really hit the world) – An example of a liquid stock in the Dar-es-Salaam Stock Exchange is CRDB.

Keep yourself updated with the progress of your investments

• Updating ourselves on our progress allows us to continuously review and rethink our plans. It tends to act like a form or reassurance that we are on the right track.
• Checking on your investment performance from time to time along with checking on the market can encourage resilience as it keeps you well-informed, to the point where you are not easily shaken by insignificant events.

The next step?

Now that we understand what investing resilience is, what threatens it, how we sabotage it and how we can build it, the next step is simply starting this resilience practice. Yes, it is a practice. It requires discipline and a lot of consistency, but you will find that the rewards are worth it.

Article written by Aisaa Omari . The author is an Advisory and Research Officer at Zan Securities Ltd