When people talk of investing success, it’s often around some new stock picking method, or that one time they got extremely lucky and were the exception, not the rule. In a rising market like we’ve had for the last several years, there are many people who feel like successful stock pickers. There are many people who feel like they’ve gotten lucky – repeatedly. That’s because a rising tide lifts all boats.
True long-term investment success comes from a lot more than stock picking methods or luck. But no one likes to admit that – talking about discipline and smart investor savvy doesn’t always make for the best “look at me” story to tell your friends. That’s why you have to decide what’s more important to you, long-term success and a secure future, or a good story about “that one time…..”
Having sound principles to guide your investment decisions and strategy choice are one of the best ways to ensure your ability to reach your full financial potential.
Here are some of the investing principles we abide by, and educate our clients on:
1. Markets are in a drawdown more often than not. Yes, they market may be down 3% today, but that’s normal. Don’t be alarmed, but also, be prepared that you may see red once in a while. That’s why you should have an investment strategy that is designed to “miss” the worst days, and cushion the blow to your money.
2. A rules-based, disciplined approach is the best way to ensure long-term success. You should fully understand how and why you’re invested the way you are. An Investment Policy Statement is one of the best ways to do this. If your investments don’t align with your IPS, you shouldn’t invest in it. Period.
3. Volatility eats your returns. Not risk. Risk doesn’t drive your returns, it just affects your probability of losing money. Volatility directly affects your returns, and wild fluctuations can quickly erode your wealth. This is where diversification isn’t enough – it only mitigates risk. You must have a strategy in place that mitigates volatility as well.
4. Buy and hold is easier said than done. “Set it and forget it’ is the mantra of many investment firms. This isn’t necessarily bad advice. Over the long-term, the market has produced a compounded return around 7%. However, the real return fluctuates between up 40% and down 60%. Most people can’t hold on during those drawdowns, and wind up selling at the wrong time.
5. It’s better to miss the worst days and the best days in the market. Buy and hold advisors say you must capture the 10 best days in the market, as that is what drives your overall return. And they are right. But, if you miss both the best and worst days, (by using a trend following/momentum strategy, for example) your return could be even better. Historically, research shows that the best days come during the worst bear markets, so we’d prefer not to participate in the full bear periods.
6. Markets are not always efficient. Markets rarely act the way text books say they should. Investors can and do act irrationally. Human behavior can and does move markets, and can cause prices to remain too high or too low for long periods of time. This is why momentum exists. Your strategy must be capable of capitalizing on these market realities.
7. Consistent returns are more beneficial than big pops here and there. Consistent returns, even if they’re lower, will increase your dollar growth over the long-term because it means you’re offsetting volatility. This makes for a much smoother, less emotional investment ride. In turn, it can prevent you from making bad decisions with your money. This is a result of a strategy that controls volatility.
8. Look at the downside first, not the upside. Every smart investor knows it’s not about your chance of success – it’s about your chance of failure. And remember, failure is not an option. Therefore, your strategy must minimize downside risk.
9. Investing costs matter. These can erode your returns as much as volatility. Your strategy should work to lower the cost of expense ratios and be tax efficient. Remember that a good advisor can be worth a reasonable fee. Just be sure they’re providing you with value-based solutions, not selling you products.
Why Does it Matter to You?
The principles listed here don’t encompass every good investing principle out there. But, if you act based on these principles, you’ll find that you’ve built a strong foundation for long-term investing success. Remember, this is your life. You get one shot, so make sure you do everything you can to make it successful, and succeed in living the life YOU want.
Our strategies are built based on these principles.
Want to see how you can minimize downside risk, mitigate volatility, increase consistent returns, and protect your bottom line? Click below.