We often say to clients that the best investment strategy is one that you can personally stick to long term. For some, the benefits of investing may seem small to begin with but as each year passes the gains get incrementally larger as the impact of compounding kicks in.
Unfortunately, much of the noise in the media, as well as our own emotions, can make sticking to a strategy a challenge.
The good news is that there are some practical steps we can take in advance to ensure we don’t get distracted or let our emotions take over. Here are 5 tips for maintaining a sensible investment strategy, so you can stay focused on what matters.
We should still hold cash even in a low-interest environment
The combination of a low-interest environment and strong investment performance over the last decade may have tempted us away from holding cash.
‘Why hold cash at less than 1% when the stock market is performing so well?’
The coronavirus implications are a good case study to argue for the importance of having a cash emergency fund.
If we don’t hold enough cash, it may cause unnecessary worry during uncertain times.
To have to liquidate investments for an emergency, not only halts our progress on our investment journey but also reverses it.
Consider holding 6-12 months of enough cash to cover your costs regardless of current interest rates and whether markets are rising or falling.
We shouldn’t take more risk for the sake of it
If the stock market has always been rising, or a particular fund is performing, it may be tempting to expose ourselves to more risk, albeit unnecessarily.
‘The stock market is performing, so I must invest more in the market.’
The level of risk you decide to take should not be due to what is performing today. It should be reflective of your tolerance of volatility and what level of risk is required for us to achieve what we are setting out to do. For example, you may consider yourself to be an 80/20 investor (meaning 80% in equities and 20% in fixed income), but if there is a big decline in the market can you sleep at night experiencing 80% of that reduction?
If you are unsure of the correct risk profile, seek professional help for a review and rebalance your portfolio accordingly
You may have been investing over some time and feel your portfolio is well-diversified. For example, you invest in a fund that invests in the US and the UK.
While this seems well-diversified, you miss out on the returns of the rest of the global market and increase your risk by concentrating too highly in one particular region. Also, is it necessary for you be 100% in equities for you to achieve your goals?
Diversify globally and with a mixture of different asset classes that are not directly correlated. Such as a mixture of equities and fixed-income investments.
Do you have all too few eggs in your basket? Do you need to diversify further?
Don’t’ let price anchoring distract you
We explain price anchoring as when we put too much weight on the purchase price we paid for an investment.
If the value of this drops significantly, we may anchor ourselves too much to the previous price believing it will return to this level.
Don’t hold too emotional a connection to individual companies. The belief that the price you paid represents its value today may distract us from having a sensible long term strategy.
This is a common problem with stock awarded as part of an employee bonus plan. Let’s say the value of the stock awarded to you from your company was $2,000,000 but is now worth $1,000,000. If you had $1,000,000 in cash to invest today, would you put it all into that one stock?
If you feel you have too much concentration risk (i.e. too much in one stock), it might be sensible to look at diversifying your portfolio.
Remind yourself why you are investing
The investment in itself means nothing if there is no reason behind why you are saving for the future.
Remind yourself what it is you are trying to achieve. What does your ideal life look? What would you do if you had more time?
If your investments don’t align with you achieving that, maybe its time to revaluate.
At Pyrmont, we believe in following investment principles that academic evidence has proven to be successful over the long term.
Namely a belief that trying to outguess the market has little success and that speculative strategies don’t last long. Principles that have proven to be persistent and cost-effective, over time, give us the best chance of success. If you feel you could benefit from implementing a more sensible approach, get in touch today.