11 Practices for Lasting Investment Success (1/3)
Have you wondered what’s truly needed for long-term success in your investing over the years?
In search of better investment results, people have tried many approaches – stock picking, buying funds, using derivatives, trying to sell at good times… and diversifying among different investment brokers. Perhaps some of your money is running AllQuant’s strategies, some are with your broker friend and some are with different robo-advisers.
Yet after all that, you’re still not sure if the way you go about your investments will work out well.
There are many great investment strategies in this world. For retail investors, AllQuant’s strategies are one of the most powerful you’ll come across. But strategies are just tools. The tool doesn’t make the engineer. Neither does the sword make the man.
Instead, it’s our daily thoughts and habits that make us who we are. It’s in the mind.
In this 3-part series, I’ll share the mindful practices that make a successful investor who he/she is. These are important no matter if you’re running quantitative investments, buy-and-hold portfolios, or doing technical trading. Want to know why there are investors who know little about investing and still turn out successful while there are those who know every technical thing and still end up with losses after 20 years?
Here’s your final missing piece of the puzzle.
1. No Dabbling, No Matter How Small
A couple of years back, I was chatting with a friend at the gym. We hadn't met in a long while, so he asked, "Hey, so what role are you in now?" I said I'm an investment adviser. Looking a little excited, he shared with me that he only just started to invest. So I said, "That's nice, what have you invested into?" His response - "Well, I tried putting a little money into some things, just to see if it goes well first. If it does, maybe I'll add more. If it goes badly, I'll try something else!"
When you first started investing, was your plan like my friend here, to start off small so that if it goes well, you'll look to continue and add on to further the investment? And if it goes wrong instead, maybe you'll pull out and minimize your losses?
Many new investors begin with this action plan. Yet have you ever heard of a new investor hitting the jackpot with an investment strategy or platform, realizing they should invest there for the next 20 years, and then going on to live happily ever after? I know I haven't.
There is a clear issue with running your investments this way - that is that it is sure to eventually lead to permanent loss. This mindset of "dabbling" where we "try and see if it works" eventually leads to buying more or at least, not selling at higher prices (if it worked, the price already went up). Similarly, when things don't go well and the investor decides to give up and dabble in another method, this results in selling or at least not buying more at lower prices (if it failed, the price went down). The dabbling cycle then repeats over and over again, each time ending with either losses realized or forgone profits.
Investors often try to avoid this by carrying out a transaction or two with conscious effort, but as long as the dabbling mentality remains, the buy-high-sell-low phenomenon eventually takes over.
So how do we break out of this cycle?
Instead of "trying things out", investors need to focus on "making things work". To do this, first, be sufficiently convinced that your investment strategy does indeed work. This is crucial (which is why AllQuant has in-person coffee sessions and courses ). Later on when markets go down (they definitely will), focus on what you need to understand and internalize further so that you can make the right decisions and continue making the strategy work like how it always did.
Once you are in the practice of making your first $10,000 of investments work, you can do the same when you have accumulated more wealth. If you dabble, eventually your net worth would multiply to hundreds of thousands, even millions... at which point I'm sure you don't want to still be dabbling.
2. Use Tools, Not Products
I once sat down at a cafe to meet a trio of new clients for the first time. Two of them were senior ladies while the third was one of their daughters in her 20s. After asking about my role as an adviser, the two seniors asked, "Da Wei, what's a good product right now in the investment market that I should buy?"
Oh no, I thought silently. While I do eventually share with clients some of the market sectors and companies we should have in our portfolio, that's rarely the question we should be addressing from the get-go. Not understanding this is worrying. When it comes to looking at investments, this is how so many of us start off on the wrong foot. And here's why.
Investments are tools to help us carry out our objective of accumulating and compounding wealth. The right tool arsenal will help you reach your objective efficiently and effectively. Investments are not products you buy off the shelf as though you are shopping for perfume... and so should not be treated as such. When we start investing, we want to construct our portfolio arsenal with a focused objective, and not just throw whatever looks good into it in random proportions. This is unfortunately how investors end up with 10+ over stocks and funds, over half of which are in the red after 20 years.
Instead, recognize that each investment is a tool you can use to compound your wealth at the right pace, with the right level of uncertainty. If you just require 8% annually to reach your goals, use investments that give close to that range of expected return. You will quickly appreciate the uniqueness of different investment tools. You will also quickly realize that greed is a common challenge investors face (can't we get >8%?), messing up your self-perceived risk appetite and therefore making discernment extremely important (the 9th practice to be shared in a subsequent article).
Within an investment strategy, different funds are also tools meant to give an intended portfolio effect. For example in the Multi-Strategy, commodities, energy, volatility, and cash are used to combat any falls in the other portfolio components, in the event that inflation makes a comeback.
For that one client meeting, I had to divert the conversation away from products and more towards strategy. It wasn't just the seniors' retirement funds at stake, but also the whole perception of what investments should be and consequentially, the financial future of that young working lady with them.
3. Plan, But Never Bet On Your View
Now that there's a lot of uncertainty coming from rising inflation and interest rates, it's the best time to learn about this. Today, you will notice most investors are either buying the dip or staying away from investing altogether. The first group holds the view that the market will not go into a long downward spiral and will instead rebound soon. The second thinks that the market is not at its bottom yet.
Who is right? Nobody knows for sure. So what should we do? Should we always try to be right, so that if we are right more times than we are wrong, we should be better off, shouldn't we?
No. This misconception is the grave reason why many investors still struggle to profit even after 20 years of investing. Let me explain why.
It's really simple actually. As you get more and more decisions right, the greater your investments climb in value. You will also add more to your portfolio over time while your income raises your net worth, increasing your investment size relative to the total assets you will have in your lifetime.
As a result, this means that getting it wrong becomes more and more costly over time. Eventually, that one market downturn can tear down your conviction, significantly wipe out your investments, and make it too difficult for you to ever catch back up again.
Similarly, that one miss of a market rebound can also make you lose out on that growth/recovery you absolutely needed to recover your past profits or losses. Such was the case for those who got it wrong by betting on their decision not to re-enter near the bottom of 2008.
Instead of only trying to be right, sound investment strategies always have planned actions for just in case decisions turn out wrong. Such plans keep you in the game so that getting it wrong will never be so costly you can never recover. In the professional world, this is also called hedging - a process used to protect the hundreds of millions of dollars invested by the ultra-high net worth. This is absolutely essential because keeping yourself in the game is far more important than being a bigger winner the next round, only to eventually lose and get kicked out of the game.
So what are these planned action steps that we should lay out beforehand? In the next article, I'll cover these steps on the next 4 practices needed for lasting investment success. Stay tuned for part 2!
(This article has been edited for AllQuant’s audience. The original version is on my LinkedIn.)
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