Last week I discussed creating an investment policy statement. Now that we know about managing your investments, it’s time to actually use the investment policy.
The key to succeeding in investing isn’t in finding “the right plan.” It’s actually far easier.
If you find a good plan and it works for a while and then stumbles, what do you do?
If you suddenly aren’t making the returns you expect from your portfolio, do you find a different plan?
In most cases, people do something that’s always frustrated me. They throw out the plan in full, searching for a new plan.
Researcher Malcolm Gladwell
famously showed how, if you work at something for 10,000 hours, you become an expert.
What does that mean? It’s simple: Most people fail not because they have the wrong plan, but because they don’t have the stomach to stick with their current plan.
You heard that right: if your plan isn’t working, stick with it!
To quote another highly intelligent person, Albert Einstein, doing the same thing over and over again and expecting different results is the definition of insanity. Therefore, if we’re going to stick with the plan, we have to do something that NASCAR drivers do every race.
If you aren’t a stock car racing fan, don’t let my analogy scare you. Race car drivers who win seldom come to the track with a car that’s perfectly suited for the race. After they unload the car, there’s practice. I’ve listened in on conversations over the radio between crew chiefs and drivers and it’s incredibly interesting if you’re at all interested in how effective teams communicate in business (or life in general, for that matter).
Teams that communicate well have a driver who gives off clues that’ll help you tweak. The crew chief takes this input and decides how to change the car.
In other words, the driver says, “It doesn’t turn easy enough in the corner.” The crew chief interprets this advice as, “Let’s add more wedge” or “Let’s increase the camber.”
What Does This Mean For Your Portfolio?
Your investments are the driver and you’re the crew chief in my analogy. Your investments tell you, “large-cap stocks are sinking right now in general and the US economy looks shaky.” You don’t tell your driver to park the car. Instead, you make a call (based on your investment policy statement). You either add more large-cap stocks to your portfolio to maintain your percentage or you execute your stop-loss strategy.
It also means that the car you choose to drive is appropriate for the race.
Racing teams have several cars. Some are better on short tracks. Others are geared for road courses. You bring the driver and car that/who are best suited for the conditions.
In other words:
- Know your goal.
- Find out which type of investments have performed well over that time frame
- Use this (incredibly narrowed field) to choose investments for your portfolio
- Diversify these investments based on an efficient frontier calculation (easier than it sounds)
- Manage and tweak based on your investment policy and your goals
Isn’t that simple? Now, when disaster strikes, are you making changes? Absolutely! Are you panicking and throwing away the strategy? Hell no!
Isn’t Managing Your Investments This Way Boring?
This is the most exciting part of planning.
I’d much rather maintain and tweak a plan so that the “car” drives better and better as the race goes on. It also gives me something to do with the reams of new data the markets give us daily. Instead of processing it in terms of “should I panic or not?” I’m looking at it through the filter of my investment policy and my goals.
I’ve found that simply putting together a rudimentary investment policy statement and then tweaking it over time is your best bet. Bring the car to the track….begin to drive it and let your investments tell you what isn’t working. Then make tweaks as you reach your goal.
Insanity? Absolutely not. It’s the best course of action you could possibly take.
Want more on investing? I like this piece at Jason Hull’s site entitled: Peak to Peak Investing or I’m Afraid I’m Investing at the Top!
Photo: Martin Pettitt
Done by Forty
I’m susceptible to the same mistake. I often find new asset allocations that seem more appropriate or sophisticated, and just want to scrap the Simpleton’s Portfolio altogether…
Isn’t that funny? It’s all of us, I think, DBF.
But your Simpleton Portfolio doesn’t have to stay Simpleton. Why not experiment on the “car” and make it more savvy over time?
John S @ Frugal Rules
Right on Joe! I’m of the belief that it’s the simple approach to take, yet so many make it difficult by not sticking to it or allowing their emotion to get the best of them and give up once something happens they weren’t planning on. Tweaks are great and needed, though for many the tweaks are complete changes. 😉
Thanks for the shout out, Joe!
Cat Alford/ Budget Blonde
We’re not heavily into investing yet – just a very simple IRA but I always enjoy posts like this to get me motivated to learn more and do more with it!