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Time. Patience. Discipline. Diligence.  

These are the four key components investors need to do a proper job of managing their portfolio. If you are someone who believes you can build a retirement nest egg by dabbing in the markets, it is unlikely you will ever have enough to stop working. 

One of the most overlooked aspects of investing is aggressive monitoring of your investments. Now, we are not talking about “day trader” stuff where you spend all day hitting the refresh button on your browser for updates. But it is imperative that you monitor not just what is going on in your own portfolio, but what is happening in other investments options that may fit within your strategy.  

Investing is not set-it-and-forget-it and your portfolio won’t stand a chance if you treat it that way.  

Sure, you can make money in a bull market, but how well protected is your portfolio from the next downturn. After all, it’s a matter of when, not if, it will come. That protection requires skill, discipline and constant attention. Your financial strength is critical to your ability to live at a high standard of living now and in retirement. Complacency is a dangerous place to live.  

If you are not paying attention, you just might miss an opportunity to avoid losses or realize gains. As quickly as things change today – 2020 pandemic anyone – you have to be ready to move.  

Find a Pro 

Optimizing your portfolio requires a level of attention that most individuals do not have time for. Between work and family who has time to go through all the prospectuses, read the economic outlooks, listen to investor calls. You know, all the things that financial planners to as part of their jobs. 

You have financial goals for the future. Maybe it’s college for your kids or paying for a wedding or a down payment on a house. Whatever they are, professional financial planners are trained to help investors identify their long-term goals and work with them to achieve those goals.  

No one can predict returns or market movements, but financial planners have the knowledge and experience to develop investment strategies that mitigate risks and put you in the best possible position to optimize your portfolio so you can pay for your daughter’s dream wedding.  

You put your car in the hands of a mechanic and your physical health in the hands of a doctor for a reason. They are highly trained professionals who are dedicated to helping you, or your car, be healthy and active for as long as possible. Why wouldn’t you do the same with your money, unless you think you have the time, patience, discipline and diligence to do it.  

Putting your long-term investing in the hands of a professional financial planner, will put your portfolio on a solid foundation for growth, grounded in the seven principles of long-term investing.  

The first rule of investing is you will make mistakes. Why, because you are human and humans are not perfect. Remember a few posts ago when we told you not to chase the crowd. Trust us when we say, you will find yourself doing exactly that at some point. Mistakes will happen, but the wise investor learns from their mistakes and vows never to make the same mistake again.  

How could I do that 

Investing mistakes can be costly because they lead to lost value in your portfolio. When you do lose value because of something you did, the important thing is to keep you step back from the mess and take a deep breath. Most mistakes are from decisions born of emotion and the worst thing you can do is compound the problem with an emotional response.  

After you’ve had an opportunity to regain your composure, take the time you need to look objectively at the problem. Your goal is to determine where you went wrong, recognize the steps you took and think about what you can to do make sure you never make the mistake in the future. 

Do not, under any circumstances, vow to regain your losses by taking even bigger risks. We talked before about money and emotion not mixing and this is one circumstance where you can easily start a roaring bonfire if you are not careful. 

Remain calm and focused, using logic and reason to work through the issue.  

Overcome Your Mistake 

One way to avoid future mistakes is to understand the two emotions that are always present in investing: fear and greed.  

When the market takes a downward swing, taking your portfolio with it, fear can cause you to panic and start selling. Greed, on the other hand, can cause you to take on unnecessary risks by going for the big score. Whether it’s chasing the shiny new investment object or investing too much in a particular stock, you may not notice what’s driving your decision, but greed is at the core.  

Financial planners remove the emotion from decision-making by understanding your long-term investment goals and working with you to achieve them. They help you work through investment decisions, asking the right, and sometimes hard, questions to keep you on track and rational.  

If you are a go-it-alone investor, find someone you trust, who’s not afraid to push back when they think you are about to make a mistake.  

Like everything else, investing has gone high-tech giving everyone easy access to hundreds of channels through which they can invest their money. But with that convenience also comes danger. A simple Web search will return thousands of stories of investments gone wrong because someone forgot about the long-term and made their decision to sell or buy based on short-term circumstances.  

The pitfalls are real and hard to climb out of. The best strategy is to avoid them in the first place through wise counsel.  

“Investments involve risk.” 

Not a new concept for anyone who’s ever heard or seen a commercial from any financial adviser. But have you ever stopped to consider what risks they are talking about or how you can mitigate them in through your investment strategy? 

In our last three posts, we talked about not following the crowd, buying value and diversification. Each is part of a risk mitigation strategy but determining the right amount of risk to take is the first step in the process. And that is what we will be discussing in this post.  

Types of Risk 

Tolerance to risk varies from investor to investor and is a very personal decision. However, there are common elements that each investor should take into account. The two most common are systematic and unsystematic risk.  

Systematic risks are those that have effects on the entire market. Things such as wars, pandemics, and recessions are most common. Unsystematic risks are those that affect individual stocks and securities.  

If you take too much risk, your portfolio is susceptible to marketing swings and may not leave you enough time to recover before having to begin withdrawals. On the other hand, if you don’t take enough risk, you could be missing out on long-term gains, leaving your portfolio vulnerable to inflation.  

Portfolio diversification can help mitigate both systematic and unsystematic risks by dividing your eggs among several baskets, protecting the overall value from marketing swings.  

Getting Personal 

Here’s where risk becomes personal, and you need to be honest about how much risk you are willing to take. No one wants their portfolio to lose money, but we all know that it will go up and down over time, so you need to ask yourself a couple of questions.  

First, with your long-term goals in mind, do you could withstand swings in value and take the loses in order to pursue the returns. Second, how much risk is necessary in order to meet your goals. The answer to the first question lies within you, while the second can be answered by examining several factors. These include your expectations for return, investment objectives, time horizon and appetite for risk.  

There are asset allocation tools you can use to help you determine the optimal level of risk and many of the most popular begin their calculations by considering your age or time until retirement. While both factors are useful, they are by no means the only and not even the most critical. Other factors to consider are your liquidity needs, net worth and investing priorities.  

Take for instance the idea of decreasing investments in equities and increasing fixed income holdings as you approach retirement age. On its face, the strategy seems not only reasonable but perfectly logical, as well. However, if your allocation strategy is based on age, it is likely that it has not considered longer lifespans, and the effects of inflation. Ignoring both can put you at risk of running out of money.  

 Conclusion  

Risk tolerance is a tricky thing to determine because it requires being honest with yourself and, if you don’t get it right, you could be leaving yourself open to missing out on gains or living through wild swings in portfolio value that have you reaching for the antacid.  

Finding a financial planner to help you figure out what level of risk is right for you is a worthwhile investment of time and money.  

nvesting is for the long term. There is little return in trying to “time the market” based on trends or the economic outlook. The key element focused on by the savvy investor is value. And the value of an investment vehicle is created over time.  

Think about the various funds you’ve considered investing in and what matters most to you; do you go to the six-month performance or the two-year. Six months will give you a snapshot, but two years will show you historical performance.  

Market Trends 

The savvy investor considers market trends but knows that trends alone are meaningless. The same is true with the economy. While the overall economy took a huge hit in 2020 with unemployment spiking and thousands of businesses permanently shuttered because of the pandemic, the stock market seemed unfazed. The Dow and S&P 500 ended the year at record highs while the NASDAQ had its best return in 11 years.  

While that might seem counterintuitive to most, it’s not unusual for the economy and the markets to trend in opposite directions. What’s more, the opposite is also possible with the economy growing during a bear market. And, as with everything, trying to predict what is going to happen and when is a fool’s errand, making value the most important factor when investing.  

This is not to say that market and economic trends are not important. On the contrary, prudent investors consider them when evaluating investments, but they don’t let the two factors drive the decision. We’ve written before about chasing crowds and jumping on trends and the dangers of both (You can read about it here and here) and this is an extension of those warnings.  

Institutional investors can be a good place to look for insights. When making decisions about what investment moves to make, they will “price in” how they believe the economy will affect the price of a stock. If you keep an eye on what they are doing, you will see that market trends are often a foreshadowing of economic trends. But, because economic and market movements are not correlated, all your investments should begin with value at the core.  

Importance of Value  

When you buy value, you are investing in a vehicle that is financially sound. As with diversification, value reduces the volatility of your portfolio by introducing investments that have an historical track record of stability. Although value investments can lose money, losses will be tempered by the strength of the investments because they are not as prone to the ups and downs of business as higher risk investments.  

Determining the value of an investment varies depending on the type of investment. If you are considering the stock of an individual company, there are a variety of business metrics you can use such as price to earning ration. Investopedia created a list of some of the most popular.  

Mutual funds also come in varying degrees of value, just as individual stocks, and Investopedia has another list to consider when you are evaluating investment options. Here what they have to say in the section called “Selecting what Really Matters”: 

Morningstar has since introduced a new grading system. With the new rating system, the company looks at the fund’s investment strategy, the longevity of its managers, expense ratios, and other relevant factors. 

The number of factors required to conduct a thorough evaluation are many, so take the time you need to identify the best value for your investment dollars.  

Conclusion 

While economic trends can have a dramatic effect on movement in the stock market, they do not move in perfect correlation. Very often, as 2021 illustrates, they will move in opposite directions. And because no one can predict the future, although many have tried, it is important to look first to the value of the investments you are considering.  

Ignoring the value while following trends will end badly for you and your portfolio.  

 

The fourth installment of our series on 7 Principles of Long-Term Investing is related to the last. In fact, one could look at it as the other side of the Don’t Follow the Crowd coin. However, it is a warning to avoid becoming myopic about your own investments by remaining flexible and diversified.  

Before we dive into the subject at hand, be sure to read, or reread, the first three installments here, here and here. Also, remember that you are in this for the long haul and the total return on your investments is what’s paramount.  

Diversification 

Markets are volatile. And much of the volatility comes from variables beyond anyone’s control. If you have any questions, look at wild swings caused by the pandemic of 2020 and wide variety of actions taken by governments across the globe. No one predicted 2020 and its effects will be felt, potentially, for years to come.  

Smart investors will use 2020 as an opportunity to learn about, or remind themselves, of the importance of keeping their portfolios flexible and diversified.  

We were taught the same lesson when the dotcom bubble burst in the 1990’s. Hundreds of thousands, if not millions of investors lost everything they had because they put everything they had on technology and internet startups. That level of risk is not good if you are 25 and certainly not when you are approaching retirement age.  

Regardless of your age, you should reduce risk in your portfolio by including a variety of quality investments including stocks, bonds, international securities and a few alternative investments if they are supported by your risk tolerance and goals.  

Flexibility 

Even the most prudent investor with a highly diversified portfolio faces risks. It’s is the nature of the beast. That is why the second point; flexibility is so important.  

Flexibility should be built into your diversification strategy. There are several ways to diversify your portfolio, but the most common are by industry, by risk tolerance, by country and by investment type.  

When the bubble burst in the 1990’s the magnitude of the losses came on the heels of people leveraging flexibility to move dollars into a single industry. Many did the same in 2020 as pharmaceutical and other healthcare related companies were put in the spotlight because of the COVID pandemic.   

If you diversify correctly, you can still take advantage of the market changes we saw last year and in the 90’s without putting your portfolio at risk. The easiest way is to keep enough cash on hand to take advantage as the investment opportunities present themselves.  

Conclusion 

If nothing else, it is important to remember that there is no one type of investment that is always best. Every type of investment, from corporate bonds, to treasuries, to blue chips, to small-cap stocks and so on will have their day in the sun and your portfolio should have enough diversification that some will be up while others are down.  

Remember, investing is a long-term play. You are not in it to make a quick buck and get out.  

Welcome back to our series on the 7 Principles of Long-term Investing. If you haven’t read the first two, or if you want a refresher, you can find them here and here.  

The first principle – focus on the total return of your investment – provides a great foundation for the ones that follow, including today’s; Don’t chase the crowd.  

Be Aware of the Hype 

Why is it you never put complete faith in a weather forecast? Because most of you have enough real-world experience to know that doing so is a fool’s errand. There are too many variables that cannot be controlled, so meteorologists use models – sometimes several – to build a forecast. But, still, forecasts are not perfect, and we are all required to use a little common sense. The same is true for investing. 

Watch any of the financial shows and you’ll see analyst after analyst offering their opinion of the next hot stock. Now for a little secret, if the TV analysts are talking about it there’s a good chance the institutional investors already have it on their radar and are moving money into it to take advantage.  

The same goes for your friends, family, neighbors and coworkers. By the time they are investing in the latest trend, they’re not getting in on the ground floor. They are several stories up and there’s very little room before you hit the ceiling. Put another way, whatever the hot thing is – a stock, security or sector – the price has already been inflated by the hype.  

Remove Emotion 

We aren’t suggesting you ignore the TV analysts or your friends and family, but the hype around their recommendations usually leads to decisions born of emotion rather than reason. And emotion and money do not mix well. Savvy investors seek objective, independent research that uses the best information available, calculated choices and a realistic assessment of risk and determination to avoid making decisions based on purely emotion. As we’ve said in previous posts, investing requires thinking and panning for the long term. Chasing the latest shiny investment object is anything but. This is the reason it is critical to test every decision against the first of our seven principles.  

When faced with the opportunity to chase an investment trend, ask yourself if doing so is putting the total return on your investments in jeopardy. If you answer “no” to that question, follow what the savvy investors do. Research the trend using more than one objective source (3-4 is optimal). Decide what level of risk you are willing to take with your investment dollars. Remember, crowd chasing can lead to lower returns, so you must be willing to sacrifice the potential for higher returns if you invest those same dollars in a different investment vehicle.  

Conclusion 

We said it earlier, but it bears repeating, money and emotion do not mix. Unfortunately, that truism can be lost in the crowd when it is rushing to pour investment dollars into the latest hot trend.  

When you see that happening, when your friend and family are telling you about all the money to be made by going along with the crowd, that is when you, the savvy investor, takes a deep breath and recalls the first principle because you know it is better to assess the trend than to join it based on the lure of short-term gains.  

Remove emotion from the equation and buy yourself the time needed for the due diligence necessary so you can make a rational decision based on data, reason and what is best for the long-term health of your portfolio.