How should you invest? If there’s one question that gets to the heart of investing, this is it. After all, there are so many choices: stocks, bonds, commodities, derivatives and other instruments, all around the world. Funds, fund companies, brokers and bankers and others, all promoting their wares. How do you harvest a vast ocean of financial resources without drowning in it?
A first, critical step is to recognize that there are two parts to a sound investment strategy. First, there is the process of investing. Then there are the tools for getting it done. Unfortunately, most investors tend to confuse one with the other. By believing that process means picking winning stocks or fleeing losing markets, they quickly lose their way. By adopting a sensible approach, but turning to improper tools, they face unnecessary costs or inefficient implementation.
As we explored in our blog post, “Are You Ready to KISS Your Investment Strategy?” it helps to approach your investment journey with a set of principles to guide your way. For your “map” to offer the most dependable lay of the market land, it should be crafted from rigorously gathered evidence that has been peer-reviewed for accuracy.
If you instead lack a clear process, you are left to pick and choose your way randomly. Even if you get lucky and experience acceptable financial outcomes, you are highly likely to have to tolerate far more fear and uncertainty along the way, which will likely generate unnecessary trades, excessive costs and sleepless nights.
Who needs that, when a simple plan and the will to follow it through volatile markets can set you free? As Dimensional Fund Advisors co-founder David Booth said, “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy.”
Your clearly articulated process tells you how to manage your own portfolio. But it can still be a challenge to translate your process into action if you depend on tools that aren’t up for the job. As we expressed in our Q&A about ETFs, “Should I use a hammer?” depends on whether you are looking at a nail or a window pane.
Putting the Pieces Together
Our evidence-based process tells you how to invest in principle. You should:
- Stay the course in pursuit of market factors that have demonstrated the ability
to deliver persistent, long-term returns to patient investors
- Invest according to personal goals and risk tolerances
- Minimize unnecessary costs
These principles inform you on which tools to turn to, as well as which to avoid:
What to invest in: Seek investments that maximize your ability to manage available market returns according to your goals and risk tolerances … with minimized costs. This implies that the investment must offer clear and transparent information about its own strategies, holdings and costs. Complex “opportunities” with high or hard-to-fathom fees and black-box tactics can and should be readily ignored.
When to trade: Focusing on your own financial goals makes it a whole lot easier to know when it’s time to trade. You trade when you personally need to do so, instead of in an indecisive attempt to chase or flee hot or cold markets. In other words, it’s time to trade when: (1) Your portfolio needs to be rebalanced back to the careful allocations you have defined in your personal Investment Policy Statement (IPS); and/or (2) Your personal goals have changed, calling for a modification to the allocations in your IPS. The rest of the market can take care of itself.
Whose advice to heed: This one gets even easier. Seek an advisor who helps you invest according to the description above. An advisor who has your interests at heart and the experience to apply these processes and tools of sound investing can add value well beyond the measure of his or her fees.