Reason #5 — No Clear Investment Strategy
This isn’t just present within pensions but with almost all actively managed funds. The fundamental piece that is missing from most investment processes is a clear plan of attack.
….And NOT just when the markets are good.
It is far more important to know exactly what the strategy is when markets are not performing well and then how to best exploit those opportunities.
Once again….”Buy and Hold” is for dummies the book would say.
You have to take action during these periods of severe market movements. But what actions should you exactly take??? Let’s discuss your options in detail.
A common analogy we use is with seasonal sporting equipment….
For example, when shopping for downhill skis…would you find better deals in November or April?
How about golf clubs?
Markets are the only thing that we consistently see that people are worried and scared to pay sale price for!!! If you were in the market for a new car and suddenly it became 20–30% less you would be ecstatic!!! Investments, not so much. But there is a very important fundamental reason for this. Expectations!!! The life blood of almost all of our emotional states. You see, if you fully acknowledge, without any hesitation, that markets are going to drop by 20% at least once to twice per decade, then you would be able to plan accordingly. Both tactically, and most importantly EMOTIONALLY!!!
But plan how? Well, again if you know that the stock markets are going to drop by this magnitude in the future, then how could you exploit this opportunity?
By having cash available to invest into the markets when they are “ON SALE”.
But the question we ask almost every investor we meet is, “How can you take advantage of cheap market prices when you’re invested in the market?”
Answer…You can’t! You are going along for the ride…
So what if you deliberately set aside a measureable proportion of your assets that would actually make money when stock markets collapse? Wouldn’t that be even better?
Seems simple right?
And yet almost every portfolio manager and financial advisor overlooks this simple strategy.
They are often too busy speculating on which stocks to buy over another in a desperate attempt to “out smart” the other “smart” people within the industry.
And even worse, stock picking does not protect you during recessions as almost all stocks lose value during those periods.
- First, You must own “NON-CORRELATED” assets. These are assets that increase in value as stock markets sell off. And yes, surprisingly to most investors, these do in fact exist.
- Secondly, you cannot just standby and watch. When the markets provide an exceptional buying opportunity you must take advantage of it. This does NOT mean speculate on when or what stocks to buy, but rather to enter the market at a prescribed time and amount clearly outlined far, far in advance.
Long before emotions began to come in to the equation. Trying to be rational during irrational market sell offs is nearly impossible. However, having a clearly defined strategy on how to take full advantage of such opportunities long in advance, greater enhances your chance of executing when needed. And yet, if you ask nearly all fund managers, advisors, and portfolio managers, they cannot even describe how they will react to such opportunities.
Buying low and selling high is something that even elementary school kids can understand….And yet financial professionals continue to do the very opposite for their clients decade after decade after decade.
Let’s begin to change this for good.