Think about it – Ability to stick to a strategy is more important than the potential return of the strategy itself when picking amongst many strategies. Why? Because if you don’t stick around with a strategy for long enough, then you won’t give that strategy sufficient time it takes to work. And what’s worst is that you may end up dumping that strategy at precisely the wrong time.
Let’s take an example. Suppose there are 2 investment strategies.
- Strategy A – Expected average annual returns of 18%. Works in the long term. But can have -50% correction in the short-medium term.
- Strategy B – Expected average annual returns of 14%. Works in the long term. But can have -25% correction in the short-medium term.
Many people will tilt towards Strategy A as it gives higher returns. But will they be able to digest a fall of -50% in the short term? Very few would. I know from experience. When it begins to fall, let’s say up to -20%, they would accept it easily as it was part of the deal. Now when it falls further to up to -30%, they will start getting cold feet. And once it breaches -40%, they will start questioning whether it is going to go all the way down to -100%. And for most, their patience would run out and they will get out when it falls further to -50%. This is what happens. Most investors who get onto such a strategy do not understand their risk tolerance. So they exit a strategy at possibly the worst times. They don’t stick around with the strategy. And that is the problem.
People love novelty. They are always looking for the next best thing to invest in. It’s glamorous that way. But if you cannot stick with the investment strategy in thick and thin, you will not benefit from it.
So for most people, it might be better to even opt for the second-best investment strategy. It sounds odd but it makes sense. If you can’t stay the course with the best strategy, you won’t get the best of the benefits. Hence you are better off with the next best option – which has a higher probability of you staying the course. Isn’t it?
And I am telling you – if you want to have a fighting chance of success at investing, you need strategies that are simple, robust and more importantly, ones you can stick with.
It’s like driving. Suppose you have a distance of 500 km to cover. You have 2 options. Drive at 70-75 kmph average and reach in 6-7 hours. This is an easy enough strategy to stick to and does the job for you with high probability. Or you can take high risk and try to drive at 125 kmph to reach there in 4 hours. It’s possible to do that. but can you stick to this strategy for long enough given the risk-taking it demands? Think about it.
An investment strategy is good if first, it allows you to see the bigger picture; second, keeps you on track towards achieving your real financial goals, and third, increases the actual probability of goal achievement. That’s it. It’s not about beating others or the benchmarks. Money should help you achieve your goals. Plain and simple. And since each investor will have unique goals, it will require a unique set of customized strategies. I have said this often and will say it again – Copy-pasting your relative, friends, or even an investment guru’s investment strategies won’t work for you. You can hear them out, you can learn from them. But eventually, you will need your own strategy that fits your needs and goals.
And you must also be willing not to participate in everything. You need to say no. And you need to only participate in things that fit your approach, requirements and the overall financial plan. I am not sure who said this but I remember the meaning of what was said – To achieve your financial goals, you need to pick a well-thought-out strategy that is made up of simple repeatable parts. Once you find that strategy, you should implement it. And then you should be willing to stand by and watch while other people make money on things that you passed on. You don’t have to invest in everything. Stick to your strategy and invest in things that the strategy allows.
Most people get inputs from their friends, colleagues, family, banks, etc. and invest randomly in an unbalanced blend of strategies. The result is a directionless portfolio which will achieve no goals and which is based on a random collection of copy-paste decisions rather than a solid strategy. It is bound to fail.
The best approach to investing is to figure out a strategy you can stick with through thick and thin. And this strategy will differ for all investors.
As a SEBI registered Investment Advisor, I have worked with hundreds of small and large clients. And this is my understanding that no investment strategy will work unless the investor/client is convinced to stick around with it. More importantly when it inevitably doesn’t work in the short run. So as a practising advisor, I not only have to think about my managing my client’s investments but also the clients themselves and what they think!
I am soon going to launch a premium tool (Stable Asset Allocator) which is built on a solid foundation of asset allocation framework and factor-aware mechanism to make tactical tilts to the portfolio. And as we discussed above, it’s a strategy which you can stick with. I am sure many of you would benefit from it. More so those who have been investing randomly till now.