Home' Trinidad and Tobago Guardian : November 9th 2014 Contents NOVEMBER 9 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
Most people under-
stand that a key to
success is to become
a prudent investor.
As a result, they
study the markets and acquire investment
advice. Most people become pretty good
at discerning the smart advice from the
bad in the process, but there s a danger
here. Some seemingly prudent strategies
can sometimes wreak havoc on your long-
term returns unless you completely under-
stand the strategy inside out.
Here are three investment strategies
you should think carefully about before
• Tilting your portfolio for higher
returns. Some investors tilt their portfolio
to overweight stocks in certain categories.
For example, studies have shown that
adding small cap and value stocks to an
investment portfolio has helped these
portfolios to outperform the standard S&P
500 index with similar volatility in the
And with the ease of adding these
investments to a portfolio these days, more
people are making the trade and boosting
the allocation to specific asset classes
higher than they have in the past.
There is some evidence that you might
be able to benefit by tilting over the long
haul, but there s also the possibility that
there could be a decade or more of under-
performance. Not everyone will have the conviction
to hold on to an investment that subsequently
underperforms a S&P 500 index fund for years. If
you can t stick with the strategy over the long
term, it s not a good idea to implement it because
selling and then paying the capital gains taxes will
make your underperformance even more pro-
• Bonds belong in taxable accounts now.
The standard advice is to put bonds in tax-deferred
accounts and stocks in taxable accounts because
dividends and capital gains are taxed at preferential
rates. But due to an increase in tax rates on div-
idends for high earners, much lower bond interest
rates and the possibility of selling bonds at a capital
loss in a taxable account, some people are now
saying the opposite is true.
To decide which type of account is the best place
for you to hold bonds you need to consider your
tax situation as well as what type of bonds and
stocks you own.
Make the calculation yourself, and keep the long-
term picture in mind. The low interest rate envi-
ronment likely won t last forever, so you don t
want to be caught with a tonne of bonds paying
higher interest rates in a taxable account later. If
you are in the accumulation phase you need to
think about future bond interest rates as well as
• Reduce bond duration due to the imminent
rise in interest rates. Pundits have been warning
for years that interest rates will rise, but it hasn t
happened yet. People who chose bonds with shorter
durations have lost out on the solid returns longer-
term bonds have generated for the past few years.
By shortening the duration, you are essentially
implying that you are better than the market at
predicting the direction of rates, the magnitude of
rise in short rates versus long rates and the time
it takes for the rates to rise.
After all, the yield curve already reflects every-
one s best guess as to what is going to happen.
And if you are attempting this feat in a taxable
account, you also need to worry about tax con-
sequences from the interest and capital gains.
Seemingly prudent strategies are suggested all
the time, but that doesn t mean you can reap the
benefit. Before you make any portfolio adjustments,
make sure you understand the strategy completely.
If it s a short-term strategy, decide when you switch
back to the tried and true and pay attention to any
tax consequences. If it s a long-term strategy, then
you have to resolve to stay the course even if it
doesn t work immediately.
Decide if your time horizon is long enough to
wait it out if the outcome goes against you for a
Three investment strategies
to think twice before following
KINGSTON, JAMAICA BAKERY
Serious inquiries only.
Asking Price US$550,000 obo
Call - 1-876-447-5975
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