5 Tips To Help You Stick To Your Investment Strategies
There are so many obvious similarities between strategies used in winning a cycling race and winning in investments. Those who understand the need to properly devise strategies, stand a better chance of winning the race.
As shared by Edward Smith, head of portfolio management at Australian Unity Investments (AUI) in an article on Money Management, there are three common types of cyclist in a cycling tour. The sprinters typically boast perfect timing and immense power to accelerate for a short distance, but they would not be able to perform consistently in mountainous and rough terrains. Conversely, the mountain climbers, understand well the power-to-weight ratio and have adopted a tough mentality and immense stamina. However, this type of cyclists can’t sprint. And lastly, the time trial cyclists are equipped with both power and efficient cardiovascular system, keeping them fit and strong in long rough roads, but they will find it hard to strive through the mountains.
In a nutshell, Smith said, no one cyclist is good at all geographical conditions. Any cyclist joining the tour then needs to sketch a strategy that will help him win the cycling stages he is best suited for and choose a team that will provide support in terrains that are not his strength.
Similarly, there is no one ideal investment product that will be suited for all market conditions. That is why it is important for investors to have a strong and diversified investment portfolio that can see them through the bad times and make profit through the good times.
Their strategies must help them see the big picture and keep them on track towards achieving their end goals. In every game and every competition, there is a strategy behind it. The same should go for your investment.
If you want to give yourself a fighting chance of success at investing, you need strategies that are simple, robust, sustainable and insightful. Here are five ways that will help you stick to your investment strategies so you’ll stay on track all the way to the finishing line:
1. Think of your strategies as a process
If you can’t describe your strategies as a process, there is a higher tendency of your winging it. To avoid that from happening, you need to have your strategies down pat.
It is recommended that you write down your investment strategies in a flow chart process, indicating what you will do or react in different market conditions or investment situations.
Writing it down will help you articulate and visualise it, as well as guide you through difficult market times in what to do, instead of making emotional investment decisions.
From time to time, you need to vet through it to make sure it is in line with your long term financial objectives. Though your strategies are drawn out, they are not set on stone, hence, always be flexible according to situation. If you notice flaws after a certain market experience or your financial objectives change, then you need to tweak them accordingly.
2. Should you hold or sell?
Your process should be able to help you decide whether to sell or hold a stock objectively. To carefully monitor the performance of your assets so you can react in a timely fashion, you will need to create two sets of objective for each investment type:
- A targeted return (e.g. I want to make 10% a year by buying blue chip stocks.)
- An acceptable stop-loss target (e.g. If I bought a stock at RM8.00, I am willing to wait till it drops to RM6.50 to choose to exit.)
These objectives will avoid the problem of inactions that many investors have the tendency to fall victim to.
Before entering any investment, you must have a clear idea of what you want to achieve. Without a proper plan straightened out, it will difficult to make wise decisions when you are in heated battle of waiting or exiting.
3. Measure the effectiveness of your investment strategies
How do you know if your investment strategy is working or not. Do you have a way to measure the effectiveness of your strategy? Only when you can measure it, you can fully understand how well it works and improvise if you need to.
You can use both relative and absolute benchmarks to measure the effectiveness of your strategies. The benchmark you choose must match your financial objective, which should then match your investment strategies.
Relative benchmark refers to passive market index like FBMKLCI, while absolute benchmark refers to a targeted investment returns, such as 7% annually. It can be tedious and time consuming, but it is important for you to gauge the amount of risk you are taking relative to the benchmark you have set. Record the volatility of your own portfolio’s returns and compare it with the volatility of your benchmark’s returns.
By having these benchmarks, you will avoid making investment decisions based on emotions and rumours.
4. Set up a safety net for your investments
A common portfolio would have a mixture of stock market, real estate and exchange traded funds. However, if you fear taking on too much risks, then bonds can be used as a safety shield against the volatile market conditions.
The higher the quality of the bond, the better hedge it is against stock market-related investment losses.
Government bonds are more conservative, and hence typically yield lower returns, compared to corporate bonds. For investment safety purposes, you can also opt to invest in unit trust funds and exchange traded funds.
5. Identify your investing amount
Identifying your investment amount or also known as position sizing will help you draw up a realistic plan to achieve your financial objectives. Position sizing means knowing how much stock to buy in an individual trade or how much to invest if it is a bulk investment that will be put away.
Unfortunately, most investors fail to put a great deal of thought into this, which can make or break one’s investment performance.
You need to first set your financial goals and determine how much you need, and work backwards from there to understand how much you need to invest and how you need to invest.
For example, if your ultimate retirement fund is RM1 million, and you have 30 years to invest, you will need to contribute RM600 every month, and your portfolio will have to consistently yield 7.5% per annum, assuming your initial investment is RM20,000. In order to achieve the average returns of 7.5%, you must be able to identify how much to put into which investment product.
When it comes to investing, each investor will own a unique set of financial goals, which requires a unique set of strategies. Therefore, it it’s definitely not advisable to adopt or copy your relative, friends, or even an investment guru’s investment strategies. You can learn from them, but you will need come up with your own strategy that fits your needs and goals.
Saving for a house requires short-term win, which means you need to be a tad more conservative, whereas long term goals such as retirement goal, will have time to digest the ups and downs of the market, allowing you to be more aggressive.
The three main determinants of any strategy is risk appetite, duration and asset allocation. The success of your investment will depend on how you match these changing determinants according to the market performance.