Humans are optimistic creatures, at least when we’re thinking about the potential to make money. Optimism makes buying easier, sometimes dangerously so. By the time we come to think of selling, though, the future has already happened, often delivering facts and figures that contradict our formerly optimistic view.
There are psychological traps when it comes to investing. If you’ve considered selling a stock just because the price has fallen, you might have succumbed to availability bias. Because the share price fall offers readily available information that’s likely to be widely commented on, it becomes our focus, usually at the expense of more useful but less available information. Or you could simply be herding, selling out because that’s what everyone else is doing. Or it could just be the emotional rattle of seeing your investment balance deteriorate and the fear that it may continue.
Unfortunately, many retail investors tend to buy in at the top and sell out at the bottom because they let emotion drive their decision making rather than rational, fact-based analysis. This short checklist will help you avoid that expensive mistake.
1. Have the fundamentals changed?
We invest in stocks because, over time, we expect earnings to increase, which will increase dividends and capital growth. That begs the question: if a share price has fallen but its fundamentals remain sound, should you really be selling?
Recent operating updates from the AREIT sector are a good example. Whilst the AREIT index has fallen around 13% since 1 August 2016 (as at 14 December 2016), business performance is travelling along exactly as we expected. Occupancy rates are high, asset values are growing, as are earnings per share. For genuine income investors, this is the information to focus on, not share price falls.
If an investment is meeting your original investment objectives (in the case of the APN AREIT or APN Asian REIT Fund, the consistent monthly income), and you still feel the urge to sell, you may be a victim of one of the above psychological biases.
2. Has the macro environment changed?
Whilst market fundamentals can change, so too can the environment in which companies and trusts operate. Property trusts are again a good example because changes in interest rates affect valuations in the sector, which in turn affect share prices.
The recent rise in global bond yields pushed AREIT prices down. Only if you believed interest rates were heading higher would you think about selling now. For the record, APN does not. Australian interest rates remain at historically low levels and recent GDP figures increase the possibility of them falling rather than rising. Remember also that economic forecasts are inherently unreliable. If you’re basing a sell decision on what might happen, try and factor this into your thinking.
3. Has your investment objective or time horizon changed?
We recommend AREIT investors have a time frame of at least a 5-7 years, although many investors stay with us for longer than that. Sometimes, though, life intervenes and you need to sell some assets for ready cash. That’s understandable.
If you’re not in that situation but are still thinking of selling, ask yourself if your objectives have changed. If a reliable, relatively high monthly income stream is no longer your top priority, fair enough. But if it is and you still feel like selling, chances are your decision has an emotional rather than rational basis.
4. Do you have a better option for your money?
Every investment decision has what economists call an opportunity cost. Once you decide to sell, the opportunity cost is the loss of the return you would have got from your investment. If you hang on, it’s the return from alternative investments that you forgo.
It’s an important consideration, especially for income investors thinking about the recent fall in AREIT prices. The opportunity cost of selling is the future capital growth in AREITs (the APN AREIT has achieved a capital return of 6.63% p.a. since inception1 plus an income stream currently yielding 6.21% p.a.2 If you can’t find a better use for your money with a lower or equivalent risk, you may be better off holding on (again, for the record, we believe AREITs are now better value, delivering a higher yield than they have for quite a while).
If you answered ‘no’ to each of these four questions, there’s a good chance you’re about to make an emotionally driven mistake. Perhaps you’re worried that recent price falls will continue and are ignoring investment fundamentals. Or maybe you’ve read stories about online shopping’s impact on shopping centres but have missed the case for their transformation.
One further point: take this approach far enough and you can turn the mistakes of others to your advantage. Sentiment can turn against a market or sector, pushing share prices down. But under the bonnet things can be ticking along just fine. Once you’ve got past the fear embedded in a falling share price you can use the opportunity to top up your holding at cheap prices. Accepting the vested interest in our position, we’d argue that’s the case with some AREITs right now.
Of course, this means going against the herd. But if you want your portfolio to beat the market you have to do things differently to the market.