5 Investment rules Look at that swing

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Throw it away

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 7 May 2016.

One of the interesting things I have learnt about children, since becoming a parent, is that they hate throwing anything way. It’s most obvious when I ask one of the kids to throw something in the bin for me. They’ll firstly give me a strange sideways glance, as if they can’t believe what they’ve just heard. Then they’ll walk ever so slowly over to the bin and peer inside, presumably checking to see if they can make out the fires of hell far below. Then the offending rubbish is held over the bin, carefully pinched between thumb and forefinger, before it’s dropped into the darkness, followed by another wary look into the bin, just in case the act of dropping the rubbish had started an inexplicable sequence of events that was going to culminate in a spectacular explosion. This very lengthy process can take a long time when someone has dropped a bag of sultanas on the floor.

Another rubbish related behavioural trait, is an apparent inability to distinguish between what’s rubbish and what’s not. An empty box for example, no matter its origin, is most definitely not rubbish. It’s an impromptu and mobile treasure chest, regardless of whether it initially held beer, nappies, shoes or coffee. Any empty container really, if it’s not shoved into the bin quickly enough, gets claimed by one of the children and pressed into storage duties. Obviously hoarding is a trait which we develop at a young age and which some people never really let go of.

When it comes to investing however, there’s no place for hoarding or for not wanting to throw anything into the trash. No matter how diligent is your investment selection process, at some stage you are going to end up owning some investment garbage. Now if you were a five year old, you’d be tempted to hang on to that garbage for the rest of your life, but as an adult you need to be more discerning. Some companies or investments are simply never going to make it back, from an investment perspective, and need to be let go. It’s not an easy task however, with a substantial body of research showing that investors hate to realise their losses, preferring to hang on in the faint hope of an improvement, an approach which typically leads to lower returns. Just as Jack and Kate don’t need all those empty cereal boxes stashed under their beds, do you need to keep the rubbish in your portfolio?