Getting back on track with your investments - Greg Zografos

One year has passed since the Lehman bankruptcy, the AIG bailout, and the worst stock market crash since the Great Depression. Retirees have seen their portfolios decimated, and others following aggressive portfolio allocations, irrespective of age and wealth, have suffered a similar fate.

The investment public, including retail and institutional investors, have lost confidence in the capitalist system. Investors are walking around the financial “landscape” without a map.

The first question the “do it yourself investor” wants answered is “how do I get back on track?” Sometimes answering a question is deciding what NOT to do. Speculating with a large part of your portfolio in penny stocks, concentrating on a specific sector or a handful of stocks will more often than not put you in a compromising position. So these actions need to be avoided if you are going to rebuild your portfolio.

I personally suffered through the savage tech wreck of 2000-2003 and learned some of these lessons the hard way. The honest reality for people rebuilding is knowing that the road back is very slow and very long. However, with a disciplined approach and an eye on the horizon, many will get their portfolios and retirement plans back on track.

After the reality check, the next step is to refine your investment process and create the “map” to get to your destination. The first step is to define risk tolerance, which goes hand in hand with your return objectives. Therefore, one needs to define the amount of capital they are willing to lose before it truly affects their investment psychology. In fact, the psychological pain threshold is far lower than many initially estimate. The year 2008 was a wake up call for the often quoted “sleep at night” factor and overall portfolio risk management.

One can use various financial planning websites that offer questionnaires for defining risk and reward. The next step is to start tracking your portfolio performance. The easiest method is to create an excel spreadsheet to keep track of monthly portfolio values, asset allocation, and relative performance versus the TSX and S&P 500. One should create this comparison over a one-to-10 year horizon. If you realize that the indices have trounced your personal performance, then you either need to revise your investment process or buy an index fund or ETF.

If one chooses the managed portfolio route, then you need to find a portfolio manager or advisor who has actually outperformed the indices over a three-to-five year cycle.

Finally, after figuring out risk reward objectives and performance history, the final step is to actively watch the market, create a watch list, and conduct preliminary research and analysis.

The internet provides a plethora of research including analyst reports, corporate websites, quarterly reports, annual reports, and professional recommendations. In fact, all the data is overwhelming, so a defined process is critical to success. Since all the information online is public, you will not have an advantage versus the market and its participants. Saying this, you are better off limiting yourself to the most reliable sites to get a better understanding of markets, securities, and risks. For the novice and intermediate investor, the following websites are excellent for refining your investment process: 

- Bloomberg gives you the “big picture”

-Yahoo Finance is efficient for getting a quick overview of a company, its financials, and recent news stories 

- Corporate websites and official disclosure websites such as Sedar and SEC.gov provide details regarding products and services, the management team, and financial statements.

Now that you have refined your process, you need to add a healthy dose of skepticism. The job of both corporate management and investment analysts is to convince you to purchase the stock. The tools above will help you define risk/reward objectives and a framework for conducting research and analysis.

After all, we all have limited hard earned capital, so the investments we make should always be well understood.

Greg Zografos is a professional investor and president of Zografos Investment Management. Greg grew up in Sudbury and currently lives in Markham. This is the first in a series of monthly financial columns he will be writing for Northern Life’s business section. Greg can be reached at [email protected].