As a firm that manages over a billion dollars of individuals’ hard-earned life savings, it is important that we abide by a strict set of rules. The key to those rules is having our “bible” and investment strategy. Is it the greatest investment strategy of all time? Doubtful. Is it what we believe to be a really good one that is repeatable and strategic? Absolutely. But, this blog isn’t about us or our impressive investment team led by our CIO Mike Horwath (shameless plug). Rather, I think it would be beneficial to understand and learn what goes, and doesn’t go, into a sound investment strategy.
The Do’s & Don’ts of a Good Investment Strategy
I thought it important to list out key things I’ve learned over 20 plus years doing this starting with the things a good investment strategy is and is not. Whether you are going at it alone or choosing to partner with a professional like Diversified it really is critical that you understand the pitfalls and successes of a strong investment strategy.
- You need a Philosophy– I often see too many people create their investment strategy as they go. It is solely on gut feel, and simply put that doesn’t work. Whether based on personal beliefs or academic research, have a core set of principles that will guide your decisions.
- And so it is written– Your strategy can’t live solely in your head. It has to be a well-thought-out plan and written somewhere. The act of writing accomplishes many things in helping you have a reliable and clearly defined strategy.
- Needs to be repeatable– A good investment strategy can’t be a flash in the pan. Rather, it has to be the foundation of your investment plan. It has to be repeatable and relevant in all market conditions.
- It can (and should) evolve– There is a fine line here, as there is a big difference between maturation and chasing trends. As with most other areas of your life, your understanding and philosophy will mature and evolve over time. With investing, this can and should be the same as new research and technology come to light. What this doesn’t mean is chasing the new fad or product because it’s shiny or recently worked. You must avoid this at all costs. The key here is to be disciplined but both flexible and open to new ideas.
- Stick to it– There will be times of major volatility where you will question your investment strategy, GUARANTEED. Simply don’t! When volatility appears is the most important time to stay the course. All too often I see people completely abandon or question an investment strategy during different market conditions. “Andrew why have we invested internationally it hasn’t beaten the U.S. in XYZ years?” or “We need to sell it all and buy gold now!” I cannot stress enough how detrimental this type of overreaction can be to portfolios and financial plans.
- It doesn’t always outperform– This is one of the major keys to understanding a good investment strategy. It can’t outperform in every market environment, and that is OK. This is super important to understand, and even us pros fall guilty of this. There are investment environments where even the best strategies “underperform”. This is by no means a reason to abandon a strategy as quite frankly it should react that way. Too many exogenous things can happen in the short term that can go against any strategy, but keeping a long-term perspective will help, and always remind yourself that the principles that make up your philosophy will work over time.
- Check emotions at the door– This is a common theme in this blog but it is absolutely vital that investors keep their emotions in check. Markets can be volatile and news organizations make a lot of money off of scary, obnoxious headlines. By always attempting to be unemotional and rational, decisions are made through a clear lens and with the right frame of mind.
- Has to work for you– This one is really important in my opinion. The goals and risk tolerance for a perpetual college endowment are very different than the retired couple who are drawing down on their assets. There are many strategies out there that can work, but most importantly it must work for you personally. You must have confidence that the investment plan is aligned with you personally and meets whatever those objectives happen to be. At the end of the day, the plan in place may be a great one, but if you don’t believe in it, you won’t stick to it and you are ultimately destined to fail.
- Create your own metric– How will you measure your success in investing? Many of our clients are focused on the ability of the investments to meet their planning goals, while many large asset managers are focused on very specific metrics. Be that as it may, figure out what a successful investment metric is for you as it will help you keep a focus on your real success.
- Know your biases and get outside opinions– Yes even a firm like ours recognizes we have blind spots. One of the biggest problems in research is something called confirmation bias, where individuals only look for data or opinions that agree with their previously held position. Get comfortable challenging yourself and your beliefs as it will only make your strategy that much stronger. This is a core value of our company and something we focus on with regard to investing, which is to always challenge our beliefs in an effort to always be improving.
Do finish reading this
Clearly, we here at Diversified, LLC put a large focus on our investment strategy & philosophy. It is a key tenant to our success and allows us to have something that we can stand by. We have a methodical process that we repeat time and time again. It is consistent and repeatable which again is critical to this craft. Our clients put an enormous amount of trust in us to oversee their financial assets and that deserves a dedicated team with a philosophy, process, and consistent dedication. As many of you also know, we’re committed to communicating our thoughts and beliefs to you on a consistent basis. We know by sticking to our plan while evolving and challenging ourselves we deliver a strategy that will alsign with your objectives regardless of what the world and markets throw at us.
Hope you found this helpful and as always stay wealthy, healthy, and happy.
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