Do You Have An Investment Strategy?
About the author: Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. Jeff has earned the Life and Health Insurance Licensure and has passed the Series 65 examination. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
DO YOU HAVE AN INVESTMENT STRATEGY? OR ARE YOU JUST ALONG FOR THE RIDE?
I have heard that often one’s biggest lessons learned in life, are often the hardest. When it comes to learning lessons in the stock market and investing, those lessons can often come with a substantial price tag, especially so in the absence of a plan.
One of these learning opportunities presented itself in the markets the last quarter of last year with the first appearance of real volatility in a couple of years. The volatility that presented itself was not out of the norm, and the movement experienced was considered “normal”, yet for many it came as a shock to the system, and many are still working to get back to where they were prior to the volatility. It is exactly times like these where these lessons can become especially expensive.
I recently had a conversation with someone that has since opted for the “have a plan” approach. Prior he managed the assets himself. I applaud those who take an active role in their financial planning and stay engaged, but in some situations, we can be our own worst enemy.
This individual did things by the book according to Wall Street and employed a traditional “diversified” portfolio that contained over two dozen different holdings. The first look at his portfolio showed that he was doing everything Wall Street has encouraged, in that you should be holding large cap stocks, mid cap stocks, small cap stocks, international stocks, emerging market stocks, corporate bonds, municipal bonds, short duration bonds, high yield bonds, etc., oh, and don’t forget holding all the different sectors as well. It has been pounded into the retail investor that holding all this “stuff” makes you diversified and positioned to weather some storms in that some holdings will go up, and others will soften the blow when the markets get choppy. The only problem here is that it doesn’t always work without a plan.
What I believe is the first part of the problem is that “traditional” portfolios tend to have significant overlap which increases your risk and decreases your portfolio efficiency. An example of this is holding multiple large cap funds and going the extra “diversification mile” and also holding all the different sectors, just as Wall Street suggests. The result is holding the same stuff, multiple times. This translates to taking more risk without the reward (return).
What I believe is the second part of the problem, and what many fall into the trap of, is the absence of an investment strategy. Simply holding positions without the presence of a plan of what to do with them, in different environments, is merely hanging on for the ride, and hoping it works out. Here in lies the root of the problem. Don’t get me wrong, diversification, and asset allocation are critical in portfolio design, but without a supporting plan, you better be ready to just “hang on”. Unfortunately, this individual fell victim to having to just hang on during the last wave of volatility, and at the time of our conversation, had not yet recovered as opposed to being able to take advantage of the “sale” the market presented.
We as individuals tend to seek out sales in nearly everything we buy, often delaying a purchase until it is on sale. Many times, retail investors act in the opposite of this when it comes to investing. It is no different than walking into your favorite retail store, finding an item you were looking for with a price tag of say $100, walking to the checkout and shelling out $120 for that item. Would you not prefer paying $80 for that same item? Many would opt for the discount.
This is precisely the environment we were presented late last year, a sale. With the absence of a plan, the buying opportunity is missed, in addition to a much larger hole to dig out of which extends the recovery time (and can increase heart burn). One of the more common mantras’ when it comes to investing is “buy low, sell high”. So, very simple, yet often challenging to execute. Those four words imply a sense of necessary action, and a plan to support it. Absence the plan to act (before the situation presents itself), in conjunction with the ability to identify the appropriate time to do so, likely ends as a very expensive lesson learned in the aftermath.
Fortunately for the individual I met with, he is now on the “have a plan” side of things and will not only be able to sleep a little better the next time the markets get choppy, but also be able to take advantage of the opportunities presented. Simply having a boat and sailing out won’t get you to your desired destination, having an experienced captain, a plotted course, and a plan will.