Do you have "bottom drawer" investments?
What is a bottom drawer investment?
Some of you may have heard the old saying about bottom drawer investments. It refers to buying a bunch of reliable shares (often called stocks), then sticking them in your bottom drawer along with other valuables, to be forgotten about. This old saying ignores one unavoidable fact: nothing stays the same.
When it comes to investing, things change
Small companies don’t always stay that way. Some grow up to become large companies – which means your shares will grow in value too. Shares that have low prices relative to fundamental factors like profits, cash flow, dividends or the value of their assets can turn into relatively highly priced stocks.
Likewise, with the passing of time companies with large valuations can turn into small companies. This is especially the case as technology can make business difficult for many older businesses that were previously well-established (for example, Blockbuster Video or Kodak).
The price is a measure of how shares change. Prices change from day to day, from hour to hour, from minute to minute and even from second to second. What moves prices is news.
News will usually move prices in one of two ways:
- Negative news will normally cause investors to sell shares. Bad earnings reports, poor corporate governance, economic and political uncertainty, as well as unexpected, unfortunate occurrences will translate to selling pressure and a decrease in stock price.
- Positive news will normally cause individuals to buy stocks. This could be because of good earnings reports, increased corporate governance, new products and acquisitions, as well as positive overall economic and political signals.
Prices don’t tend to change on anticipated information. Price changes on news. And the definition of news is something that is out of the ordinary, unexpected, noteworthy or that makes people sit up and take notice.
Of course, prices don’t always change as dramatically or suddenly as might be expected. Individual share prices can move by minimal amounts over months or years.
But - news can be misleading
The trouble is, even for professional investors, (let alone for “mum and dad” investors!) news can be misleading or difficult to interpret.
Investment markets will always gain plenty of media attention. Often this attention focuses on doomsday claims based on no real logic or analysis. This is because media outlets (such as news websites) are businesses which rely overwhelmingly on income provided by advertising. The more people they get to see their news, the more adverts they can bill for. This means that most media won’t always focus on the truth but are more likely to dramatise matters, and use attention-grabbing headlines designed to create fear or other strong emotions.
Some people believe you can time the market by getting “in” just in time for the investment markets to rise, then sell just before they have run their course. The trouble is, there’s little evidence that anyone can do that consistently, reliably or without running up huge costs that wipe out the extra earnings they make.
Prices of stocks in competitive financial markets represent the collective judgment of millions of investors based on current information. So, instead of second guessing the market, work with it. Let the market work for you over the course of time.
The key is to focus on what you can control. You have no control over the markets, but in consultation with a financial adviser acting in your best interests, you can create a cost-effective, tax-friendly, and diversified portfolio that matches your goals and risk tolerance.
Even the famous investor known as the ‘Oracle of Omaha’, Warren Buffet, has said that “Because there is so much chatter about markets, the economy, interest rates, price behaviour of stocks, etc., some investors believe it is important to listen to pundits – and worse yet, important to consider acting upon their comments.”
He went on to say “I know what markets are going to do over a long period of time: they’re going to go up. But in terms of what’s going to happen in a day or a week or a month or a year even, I’ve never felt that I knew it and I’ve never felt that was important.”
What should you do?
When it comes to investing, it pays to play the long game and ensure you’re focussed on what you can control: diversifying well, how much you’re investing, and ensuring that your overall investment approach matches the amount of risk you’d like to take to achieve your goals.