Practical Guidelines for an Impractical World
The rules for investing do not have to be difficult. Discover 10 simple rules that form a strong foundation for investment success.
KEY TAKEAWAYS
- When building a foundation for your financial health it is important to follow consistent rules, otherwise you run the risk of gambling with your future.
- The priority of your goals both in time frame and significance are the signals that you should listen to in order to uncover how uncertain events in the market impact your life.
- Multiple goals require different strategies, risk profiles and time horizons; for example, planning for retirement, saving for your child’s education, and acquiring your dream car are goals that should not be invested in the same way.
- A practical investment plan is easy to understand and provides the steps required to get back on track should adverse circumstances prevail.
Throughout our lives, individual experience plays a dominant role in shaping our attitudes. In fact, most of our beliefs and attitudes about money are shaped by childhood experiences. It is important to realize we are human and are prone to making mistakes, but we are also capable of modifying behaviour to improve our decision making. How do we do this? We need self- confidence and an ownership of responsibility for the choices we make. In order to accomplish this, it is essential to understand our core values and develop principals to support those values so that our actions are consistent with our beliefs.
If you think of a tightrope walker, this is someone who is confident with every step they make. In order to stay balanced when pulled to one side of the rope they must correct by leaning to the other side. Every day investors from all walks of life, perspectives and experience are forced to make decisions and play their own version of the tightrope act. The consequences of making a bad decision can range from severe to a mild setback, or have no impact at all. When building a foundation for your financial health it is important to follow consistent rules, otherwise you run the risk of gambling with your future.
For everyone interested in creating a solid investment plan, here are our seven principals to help you become a more successful investor.
1. Investing is for meeting long-term goals - saving is for short-term goals
Money required in the short term (1-2 years) must be protected, as the consequence of large swings in the value of your short-term funds can be impactful to your daily lifestyle requirements. The ability to invest over a longer time horizon provides the benefit of taking a higher level of risk given the luxury of time to withstand short-term fluctuations.
2. Follow a system for investing - don’t gamble blindly
“Successful people don’t wish for success; they decide to pursue it. And to pursue it effectively, they need a system” – Scott Adams
If this rule is applied by successful people in their professional life, why not use this strategy with your finances?
It’s often easy to buy investments but harder to sell. When creating a solid investment plan, a disciplined approach to investing must be followed. Employing a systematic strategy when investing helps to prevent emotional bias from taking over and allows for a consistent approach to deal with winning and losing positons over time. Knowing when to get in and when you plan to get out before you put your capital at risk will help to provide a successful and repeatable investment methodology.
3. High fees will eat your returns
High management fees might not seem like much in any given year, but over a long time period the impact can be huge. Understanding where value is added and measuring the cost benefit associated with your strategy is significant.
4. Uncover your true ability and willingness to endure risk
Financial Ability = Amount you cannot afford to lose
Psychological Willingness = The level of portfolio fluctuation you are comfortable with
Understanding both of these is vital to long-term success when building your portfolio. If the ups and down of the market keep you up at night, you’re likely going to have a difficult time getting through those tough periods without selling.
Remember, studies show that the psychological pain associated with each dollar lost is two and a half times greater than the psychological joy of each dollar gained.
5. Ignore the popular delusion of believing everything you read
“By developing your discipline and courage, you can refuse to let other peoples mood swings govern your financial destiny. In the end how your investments behave is much less important than how you behave” – Benjamin Graham, The Intelligent Investor
A 2011 report by DALBAR shows that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years – a period in which the S&P 500 stock index returned 11.1% annually.
When it comes to making investment decisions, we shouldn’t let those with no understanding
of our individual situation make choices for us through influence, persuasion or so called expert opinion.
Working with an Investment Advisor who spends the time to understand your personal circumstances will help you plan and navigate your financial journey over time.
Planning for risk mitigation, asset allocation, investment selection and dynamic rebalancing as your life shifts will limit short-term thinking.
6. Focus on what you can control
The priority of your goals both in time frame and significance are the signals that you should listen to in order to uncover how uncertain events in the market impact your life. Your decisions should be based on what’s happening to you, not what’s happening in China or the daily fluctuation in the price of Oil. It's important to avoid the circle of anxiety created by the media outlets and take time to focus on yourself.
A comprehensive, goals-based approach that takes into account all of your assets and liabilities, including your human capital, and connects them with their underlying goal or purpose creates a more complete investment process. Multiple goals require different strategies, risk profiles and time horizons; for example, planning for retirement, saving for your child’s education, and acquiring your dream car are goals that should not be invested in the same way.
Ensuring your investment strategy is practical based on the priority of your goals will help create a focused headspace.
7. Build a practical investment plan
Don’t let the financial markets dictate your financial security. Your success should not solely depend on the ability of your portfolio to generate outsized returns, but rather seek to create a realistic plan that helps to avoid the desire to chase short-term performance. Building a realistic return/risk balance and relating it to your goals increases the likelihood that your saving and spending habits play a leading role in determining your long-term financial destiny.
A practical investment plan is easy to understand and provides the steps required to get back on track should adverse circumstances prevail. It includes risk-averse measures to protect capital during unforeseen market events and focuses on a disciplined rules based approach to investing that is repeatable over time.
To give you an idea of how such a system works, think of a GPS. Imagine what it would be like to have a GPS-like device that converts high-quality decision-making principles into a repeatable system. This type of approach provides perspective of your journey, eliminating much of the confusion surrounding what the future may hold.
“Hundreds of studies have shown that wherever we have sufficient information to build a model, it will perform better than most people.” – Daniel Kahneman
The views of Ryan Gerstel do not necessarily reflect those of CIBC World Markets Inc. Adam Goldstein is an Associate Investment Advisor working with Ryan Gerstel, Investment Advisor. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.
