When there are times of extreme uncertainty in the world, you tend to see a lot of swings in the stock market levels. One day you are happy because the markets are hitting all time highs and all your investments are up and the next, you are worried. What does the future hold? What do you do? I have witnessed and observed these trends time and time again alongside of investors losing valuable sleep over their money. Therefore, the purpose of this blog article is to help investors find peace with their portfolio no matter what is happening around them.
The Benefits of a Strategy
For purposes of this article, I am defining investing as trying to grow your money in the stock or bond market. I often talk about strategy being the most important thing when it comes to investing. This sounds boring right? However, I am going to argue that having an intentional and well thought out investment strategy can take the emotions completely out of the equation. There are unlimited combinations of selling and buying you could do in one year which I believe is the part that provides the greatest emotional stress for investors. Which is the right move? Well, the truth is you will never know which was the best combination of stocks or bonds until the year is over. What is key to remember here is that there is no right or wrong to this, there is just your own strategy.
Now that we are on this topic, may I briefly review what I feel are the key components of an investment strategy:
· Level of risk; fluctuations in value that you are willing to take or capital loss risk
· Guidelines on when to buy or sell securities in the portfolio
· Parameters for the amount and combination of stocks or bonds to hold
· When to buy, sell or take gains.
· Oversight and evaluation of the strategy. What is your definition of success?
“Investing isn’t about beating others at their game. It is about controlling yourself at your own game.”
Two Key Components
However, before you decide on your strategy, I am going to argue that there are two things key components you should consider before you invest. The first is time and the second is mindset.
The kind of time I am talking about here is the entire period over which your investments will be held. An easy way to determine your time component, is to ask yourself this question. “How long do I want my money invested for before it will be completely depleted?” If the answer is over three years, then you have the time to invest. This is one component of your “risk capacity”. I would even argue that retirees who are partially drawing on their funds today have the time to invest. In most cases, retirees will not be depleting all of their money within three years and therefore have time to ride out a certain level of fluctuations on the majority of their portfolio each year. Of course, proper planning and monitoring must be done each year to provide the funds needed once you are in retirement.
On the other hand, if you need to access ALL of your money within three years, you really shouldn’t be investing in the stock or bond market at all. Alternatives instead should include guaranteed type of investments or cash. There is simply not enough time to ride out fluctuations that you may encounter or to achieve your desired rate of return.
#2. Investor Mindset
Are you an investor or are you a trader? I describe these two options as the possible mindsets for investing. The answer to this question will help formulate your strategy from the ground up. You can see the high-level differences between the key beliefs for each mindset in Figure 1.
Are you an investor or a trader?
Now, before I go any further, I want to be clear. I am not saying that a strategy based on a trader mindset is wrong. What I am saying is that I have made some observations about how at ease each type of investor is with their strategy. My belief is that the more at ease you are with the strategy, the less emotions will impact your decisions which in turn assumes a greater likelihood of success.
To sum this up, people who have had the mindset of an “investor”, have generally been more at ease with their strategy and those of a “trader” mindset, tend to have more stress.
It is no coincidence that the “investor” mindset aligns with the concept of value investing as outlined by Benjamin Graham in his book called “The Intelligent Investor”. Benjamin Graham has long been known as the “father of value investing”. His philosophy aims to shield investors from substantial error and teaches them to develop long-term strategies.
Figure 1 outlines the common beliefs associated with each mindset. Do you identify with one or the other?
You will see that one of the main differences between these two mindsets is the time frame over which decisions are made and success is determined. Investors tend to think with a longer-term view than traders.
I have broken the model down into five categories:
· Time Horizon
· Buying Criteria
· Selling Criteria
· Definition of Success
It is no coincidence that these five factors align with those components of an investment strategy as outlined above. A good practice might be to use these as starting points to define your own strategy.
To summarize, if you are finding yourself unsatisfied or stressed about your investment strategy, the solution might be as simple as changing the way you see it. If you can’t do this on your own, a professional advisor may be able to help you implement these changes as they will work with you over time to keep you focused.
Susan Brown CLU®, FEA, CFP®, RRC®, CIM®
IA Private Wealth ǀ Propel Financial Life Management
Insurance Advisor ǀ Propel Insurance and Advisory Inc.
T: 403-616-7699ǀ firstname.lastname@example.org