Earlier on in my professional career I used to be an Investment Advisor. It was a fun career. I learned a lot about the financial services industry and I always felt like I was “in the know” because of my close proximity to the market and all the latest investment trends. Now that I no longer work on a day-to-day basis in the market I spend a fair bit of my free time reading about the market because it is still relevant to what I do professionally, and equally importantly, it affects my personal investment portfolio.
Since leaving the financial services industry I’ve become my own investment advisor. I use a number of different resources to research public investment opportunities, but the most important thing I do is stick to a set of principles that I use to guide my investment decisions. I’d like to share my process for how I think about investing that you might find helpful as you think about your personal investment strategy. To be clear, there are a wealth of talented investment professionals in the industry far more informed than I am, so don’t take what I say as gospel. I’m only sharing what I do and how I think about things. By no means is this considered investment advice for your personal situation.
My Investment Principles
1). I don’t believe in trying to “time” or “beat” (i.e. outperform) the market.
For the average investor (which most of us are), attempting to time or beat the market is extremely difficult. There are professional traders I know who work for hedge funds or trade on the floor of the stock exchange whose full-time job it is to “beat the market,” and even they have a hard time doing so. If they do outperform the market they generally do so by 3 to 4 percent, which sounds small, but can be significant over long periods of time. My personal investment objective is to beat inflation and not underperform the market. Individual investors (both professional and nonprofessional) can underperform the market – it happens. However, in my personal experience I’ve seen a lot of nonprofessional investors lose a lot of money attempting to time the market and beat the market. To that end, my principle objective is to keep pace with the market and trust that through the ups and downs, it will all balance out in the end
2). Select a suitable asset allocation model and rebalance it regularly.
In short, an asset allocation model provides a framework for how much of your money is invested in certain asset classes. There is no perfect asset allocation model, but most investment advisors structure the ratio of stocks and bonds based on a person’s risk tolerance and their age. For example, an aggressive asset allocation model may have 95% equities (stocks) and 10% fixed income (bonds). A moderate asset allocation model may have 60% equities and 40% fixed income, and a moderately aggressive asset allocation model may have 80% equities and 20% fixed income (80/20). Talk to your financial professional to determine the appropriate fit for you or you can find a few examples on the internet. Once you’ve selected an asset allocation model, you or your advisor will need to rebalance it on a regular basis. I review my asset allocation model on a semiannual (sometimes quarterly) basis and make adjustments as needed. For example, if my asset allocation model is 80/20 and at the end of the period my equities account for 90% of the value in my portfolio, I will either sell equities to purchase additional fixed income assets or leave the equities alone and purchase additional fixed income assets to return my allocation to the preferred ratio of 80/20.
3). If I’m going to purchase individual stocks, I prefer to purchase stocks that pay a dividend.
I feel comfortable purchasing individual stocks because of my past experience as an investment advisor and because my investment strategy/analysis for individual stocks is simple. I ask myself, “Does this stock pay a dividend and what is the likelihood it will continue to do so for a long period of time?” I perform a little more research than this, but this at least provides a starting point for further analysis.
I like dividend paying stocks because (in most cases) I am likely to receive a dividend payment (i.e. income) simply for holding the stock. And, if the stock appreciates in value after some period of time I can sell it and capitalize on the upside. Contrarily, if the stock experiences a moderate decline in value, the dividend acts as a buffer on the downside. This only applies if and only if the price drop is moderate. In the case of a severe drop in price the concept of having a buffer on the downside is a moot point.
4). I don’t worry about short-term market fluctuations.
After I wrote down this fourth principle, I realized this is a heavy statement. First off, it took me years to stop worrying about market fluctuations. When I first started investing I used to look at my brokerage account everyday wondering if a stock I purchased went up or down a few points. I used to drive myself crazy thinking about it all the time (I’m laughing as I write this thinking back on those days)! Second, as much as we like to think investors are rational and the market is efficient, they are not (at least not totally). It was immensely helpful to me to acknowledge and accept this.
Most importantly, I don’t worry about short-term market fluctuations because I understand my personal risk profile and investment time horizon. Additionally, based on research, I believe that the stock market generally trends upward over time. Of course there will be downturns like there was in 2008 during the Global Financial Crisis (I’m still waiting for a true market pullback due to the coronavirus, but it hasn’t fully happened yet), but again, I understand that pullbacks are inevitable and sometimes unavoidable.
I understand that eliminating emotion from investing is difficult. I get it. But I think it’s easier to do if you 1). stick to your strategy and 2). accept the fact that the market will fluctuate.
5). Invest regularly.
This last principle is my favorite and has made the biggest impact on my investment portfolio. Investing regularly instills financial discipline and from a portfolio perspective it provides compounding effects that are difficult to achieve with intermittent investing. It’s easier to invest regularly when you have an end goal or a target you are trying to achieve (e.g. saving for a house, paying for kids education, saving for retirement, etc.). For example, my wife and I meet on a quarterly basis to review our investment strategy and monitor our progress toward our goals. Sometimes we make adjustments; sometimes we leave things alone. But the most important thing we seek to do in these meetings is make sure we are investing regularly to achieve the objectives we want to achieve together.
As I stated in the beginning, these are my personal principles for investing and whether they’re wrong or right, they’ve worked for me (so far). I encourage you to write down your own list of principles to follow and share them with others. I consider myself a student of life, so if you have any thoughts you’d like to share, please shoot me a message.
Cheers – KM