|A real investment strategy is not a document or a forecast, but a viewpoint about how to respond to the forces at work around us.|
I am often admonished by my boxing trainer to breathe. Trying to control my footwork and find a proper response to an attack and put my punches in a logical sequence my brain can over-load and I forget to breathe. Time to back-up, clear the mind, regain focus and…breathe. While it is always a challenge to manage our investment portfolios, exceptional times add even more pressure, often leading to poor decision making. Or, just as often and just as bad, a refusal to make any decision. As the old saying goes, “Many a false step was made by standing still.”
So, we’re going to look at some ways to look at our portfolios and do some strategizing (which sounds a lot cooler than ‘financial planning’). Dislocations like the ones we’ve been experiencing during the pandemic suggest previous assumptions may no longer make sense, or even be viable. Time to review our financial performance measurements, think about our biases, make sure our plans (dreams) remain clearly in focus and…breathe.
Step one is to have an investment strategy.
A real investment strategy is not a document or a forecast, but a viewpoint about how to respond to the forces at work around us. A financial strategy simply answers the question, “What does my desired future look like?” What do you want? What do you want to achieve, do or have? And don’t make small plans or aim for easy goals – these do not have the power to push us to achieve the greatness we are capable of.
Next, think operationally.
What needs to be done to achieve success? What allows us to determine if the things we are doing supports our investment strategy, moving us closer to our goals? For any goal related activity, assign a probability of its value, and be honest about it. One way to think about tasks that don’t offer an obvious outcome is to admit, “I am not sure, this is why I am not sure, and this is roughly how unsure I am.” If you can’t convince yourself, or put the odds of success above 80%, then move on to the next idea.
How are you going to operate? How are you going to execute the tasks required to reach your financial goals? Bank (cash and certificates of deposit), brokerage (equities, fixed income, and debt instruments), realtor and/or property manager (real estate), or safe deposit box (gold and jewelry)? Do you want a support team, an investment advisor or are you a lone wolf? Regardless of your choice, there will be a cost involved, just accept that and move on. Remember, the biggest expense will likely be the mistakes you make, including not taking advice from people you are paid for guidance. While most of these types of decisions will only need to be made once, or twice, they can have a big impact on how hard it is to achieve your goals – if at all.
Finally, what are you going to do to limit your downside losses?
Every truly successful investor in the public eye will admit to worrying more about losses than profits. Making a profit on an investment is a possibility, but not certain, and is unlikely to be the result of anything you can influence. The risk of losing money on an investment is a reality and will happen, often because of something you do (or don’t do). If you are risk-averse and find yourself making quick decisions based on emotion or fear, how you answer the questions in the previous paragraph is critical. Investing in stocks and bonds is not a requirement for long term financial success. Saving is far important than investing and most financial problems are caused by debt.