x Abu Dhabi, UAEMonday 22 January 2018

Sometimes, just participating in the game makes you a winner

Nobody cares about your money as passionately as you do, a good reason to manage your own portfolio.

Plumbing, surgery, and criminal charges are the kind of eventualities that require the services of an overpaid professional. Investing, however, as the events of the past year have shown, is not always best left to the men in Armani suits. Most of us can count beyond the digits on our fingers, without having to take off our shoes. Setting up a share portfolio that is balanced and geared to your financial needs is not as formidable, or risky, as it sounds. Lehman Brothers, Citigroup, Fannie Mae - all were managed by earnest men whose walls hung heavy with ivy-league diplomas.

We have seen that professionals are capable of suicidal incompetence. And these were the guys who were trying to do the right thing by their clients, unlike Bernie Madoff, who at least had the excuse of being a genuine crook. The lesson of these unhappy events for the small investor is this: nobody will look after your money as carefully as you do. But for most of us, the market is a formidable entity, loaded with jargon and danger. Investing in a mutual or exchange traded fund is about as hands-on as many of us like to get. The value of running your own portfolio is that it teaches investment skills that enable you to make financial decisions based on insight, instead of submitting to the opinions of an adviser. I'll give a personal example. Between 2002 and 2007, I had the good fortune to actively trade during one of the greatest bull runs in history. The market was forgiving of mistakes and continuously profitable. A monkey could have made money. In particular, I traded commodities, retail and banking stocks, the hot items of the decade.

Towards the end of 2007, though, it seemed my luck had changed. Trade after trade went bad. I took hit after hit as my stop loss positions triggered on what had always been safe-as-houses investments. Actual losses taken individually were small, but it was death by a thousand cuts. Sooner or later, I would have to dip into capital to survive. My greed gave way to fear. Early last year, I gave in. Demoralised, I closed my portfolio, placed my capital in an interest bearing account and took an honest, paying job. Nine months later the gestating financial crisis struck. When it did, I was giddy with relief.

My pile was intact and growing, albeit at a pedestrian rate as it languished in my bank account. I am sure that in years to come, I will take my grandchildren on my knee and say, "yes, kids, I saw the great crash of 08 a'comin". But the truth is I saw nothing. My ability to predict the future is as reliable as an old lady with too many cats and a colourful headscarf. What I did have, though, was participation. And being part of the market, and responding to it on a regular basis, is what saved me. In effect, the market kicked me out, even if I did not have a clue at the time what was going on. I also admit that I have not profited much from the recovery, which began in March. It has taken awhile for me to once again embrace risk.

I have missed out on potentially substantial profits by sitting on the sidelines, as shares regained much of what they had lost the year before. But that's OK. Trading is nothing if not about risk management. Preservation of capital is everything. I am not advocating day-trading here, the extreme sport of investing. Day trade accounts rely heavily on leveraged instruments, creating mini-subprime scenarios for participants. Investing with borrowed money is a terrible idea. Ask Lehman Brothers. I'd suggest setting up an account with an online broker, preferably one attached to a reputable institution. Your retail bank probably offers such a facility. Again, avoid derivatives such as contracts for difference, stock futures and so on, unless your retirement plan is to live in a kindly relatives' basement.

Learning to trade is simple enough. There are plenty of books and websites that provide helpful tips, techniques and strategies. One such site is www.investopedia.com. There are many more. With a little research and a modest seed capital, anyone can manage a portfolio. gvenage@thenational.ae