Recently I was lead to ask: Why is it that when markets turn for the better, people tend to ignore risks they previously were obsessing about, and act like a flock of sheep running towards a newly filled food trough?
The irrational exuberance that often occurs during periods of growth makes investors race into markets ignoring many critical risks, while chasing an endless dream of outperformance. It’s simply amazing what a good year of returns can start doing to a market that was previously a little static. Because of this recent trend, I felt it wise to share the next WINNER with you.
A consistent issue I have found with a lot of prospective clients recently, has been the amount of work required to help them to formalise their investment selection criteria, so that future investing decisions become unemotional, low risk and easy to execute. This is very often the missing link in feeling comfortable when investing for many people.
Let’s look at why some people may not even have a sound investment framework to start with.
- Do you know where to find the correct framework for you? – There are so many investment methods to choose from many people don’t know even where to start looking. Or are not even sure if workable methods exist, yet alone deciding what is the best fit for them.
- Do you fear losing because you picked the wrong framework? – None of us like being wrong, but without having some investment criteria, all we are left with is considering every option available. The simple fact is there are just too many options to choose from, and trying to evaluate everything at once against everything else is simply not achievable. This is where having someone to assist you in deciding, which asset class, which type of asset and then narrowing down the criteria to groups of assets is essential.
- Does having made a loss in the past make you feel it’s just not even worth trying? – There is simply no cure for failure except to keep on trying until you succeed. For example, imagine how many of use would have ended up being totally unable to walk, if we simply stopping trying after every time we fell over? ☺
- Is the cost of implementing an investment framework a reason not to have one? – Some people argue that paying for investment coaching, education or advice, can be a waste. I tend to think that if definitely is, but only if after paying for it, you end up with nothing of value.
I tend to feel that some combination of the above must apply, because so many people seem to not have a clear picture of what their preferred investments are. The reassuring thing about formulating a set of investment selection criteria, is that once you have a good core understanding of the components that drive investing for you, any fear you have tends to fade away and the costs of implementing a sound investment framework, by far outweigh the costs of losing because you didn’t have one.
By way of example of this, recently I had an investor come to me with this choice. He could either:
- Sell out of an investment that had great fundamentals but had been slow to start?; or
- Hold on for the long haul?
The questions I asked were of use to anyone who finds themselves on the emotional investment roller coaster.
- Is this change focussed around an attempt to make a quick win? – Investing is a long term activity, and I’ve found that chasing short term growth often comes to a sad end?
- What was the basis used to buy the investment initially? – Was there a specific set of criteria applied that remains valid now, such as, why invest in the asset class over another, infrastructure changes, economic fundamentals etc?
- What has occurred to changed those fundamentals? – Is the change significant enough reason not to continue with the investment?
- How does this change, if made, affect the long term plan? – This covers things like: are the costs of change prohibitive? Does the long term target become unworkable now? Does the plan require a review?
- Having reviewed all this, is the change still valid?
You may note from the above questions, that if the original investment selection criteria had little or no basis beyond simply evaluating the short term performance of the investment, then IN ANY MARKET making a change will always seem valid.
Good investors always use well-planned out investment strategies. Ones which make their investment journey stable and unemotional. Having a good set of guidelines to follow not only helps you to make wiser decisions, but when market gets “hyped up” these guidelines become something to refer to which is backed by evidence.
I have found that a key to successful investing is to persist on a given path. A path that has been well thought out, with appropriate risk management, and definitely not one that is easy to give up just before things go right.
So do you have and use a strategic investment framework?
If you don’t, then please make an appointment to see us by calling Natalie on 03 9868 7500 and let’s get one in place to help you secure your family’s future.
Until next month, Happy investing.