Do you need to update your investment strategy?

John Maynard Keynes, the famous economist who was the guiding light for economic policy for the world in the Great Depression of the 1930s, was once criticized for changing his view on a vital economic matter. His reply was one of the smartest and most rational of all time: “When the facts change, I change my mind,” he said to his critic. “What do you do, sir?

This is the issue we investors have to consider all the time. And it gives rise to this question: “Have the facts changed so much that what looked like a good investment idea/strategy is now a bad one?”

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Telstra investors are asking this question, as they ponder if they should see the current price as the bottom. Or they could be wondering if they should buy more at this lower price to bring down their average cost of buying the stocks. When you do this, it’s called dollar cost averaging.

The same questions are being asked about our big four bank stocks, with some stock market players wondering if the Royal Commission has changed bank profitability forever. Mind you, I don’t think so but it could be troubled for some time.

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All this navel gazing, by yours truly on what are changing facts, was made relevant about April 4 when my stock market listed SWTZ’s unit price fell to $2.43. It came as the income distributions were lower than I expected. All up, the Switzer Dividend Growth Fund had been a tad disappointing.

One lady called Helen emailed and ripped into me and asked what I was going to do about it? I told her at the time that when the big banks get re-loved the unit price should rebound but I did not rub into her that even though the current performance was a little disappointing, the overall strategy of dividends plus growth is a sound strategy.

Recently, I asked my team to answer the big questions you should ask of a fund such as SWTZ. Here’s a summary of the answers:

• Price: $2.50 on 30/6/17; Price $2.62 on 29/6/18 = 4.8% capital gain.

• Total distributions for FY18 = 14.27c (64.8% franked)

• Distribution yield (based on $2.62 closing price): 5.45% pa

• Distribution yield grossed up: 6.96%.

This means the total return for an investor would have been 4.8% plus 6.96%, if you included franking credits. That’s an 11.76% pay off.

In April we would’ve been lucky to be up about 8% for the financial year to date but old man time and a great June (with the banks feeling some re-loving as commodity prices remained elevated) turned a disappointing performing ‘stock’ into a damn good one!

And that’s my point. Anyone who got fed up on April 4 and sold out of SWTZ missed a significant 7.8% gain between that time and the end of the financial year on June 30. However, the reason they might have exited wasn’t because SWTZ was a dumb strategy but because they couldn’t take what the market was up to at that point in time.

Sure, some investors stick with a stock too long, hoping for a turnaround. But there could be structural issues that will make that business lose forever. That once great US company, ToysRUs, and its shareholders have recently learnt that lesson.

Margin loan players, who borrow to buy stocks, often go long this strategy at the wrong time in the stock market cycle and get burnt. But that doesn’t mean the strategy isn’t worthwhile at the right time.

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In the case of SWTZ, it was designed to deliver income first and foremost. It should rise more slowly in a boom because we’ve chased income over capital gain but we should fall more slowly in a crash, whilst still coming up trumps when it comes to income.

And this makes me ask you: “How good is your investment strategy?” I know some investors trying to build wealth for retirement have asked investing experts to objectively assess their portfolio of assets and have been shocked when they’ve heard that their portfolio has “concentration risk”, or too few stocks and all in the same sector. Some are told they have “excessive exposure to risky assets” or are “too conservative” and, as a consequence, they could run out of money if they’re ‘unlucky’ enough to live so long!

Picking the right stock at the right time is always an important consideration but having the right investment strategy and reviewing it regularly is even more important.

It’s crucial you don’t get caught up in the moment when the market is sending you either too negative and even too positive signals. I’ve often said “the trend is your friend until it bends” but, more important than that, is having the right investment strategy.

Mine in a nutshell is to buy quality companies that pay a good dividend and I try to buy them when the market is treating them unfairly or irrationally. For example, SWTZ at $2.43.

This strategy of buying quality companies when the market beats them up drove my stock buying in late 2008 and into 2009 and every time there was a silly stocks sell off since the GFC.

We are now in a tricky time for stocks, as this cycle has gone on for some time. The trade war threat is a curve ball. I don’t know exactly how to play it. And Donald Trump is an even bigger curve ball.

I don’t think the catalyst for a crash of stocks is there right now but even if I get it wrong and I fail to see the ‘unseeable’ scary stock market event or black swan, I’m confident my investment strategy will see me through nicely.

I hope you can hold your hand on heart and say the same thing. If you can’t then maybe you need someone to take an objective look at what you’ve been up to.