1)Focus on the total real return
In an effort to reduce risk, many people over-invest in fixed-income securities, which are highly exposed to inflation risk since they do not have the same potential for capital appreciation as equities. We recommend that our clients’ portfolios contain enough exposure to equities for their ability to fight inflation through growth.
2) Don’t chase the crowd
No one knows with any certainty which direction markets will go in the future. However, a good axiom to remember is that it is usually wise to avoid following the herd. By the time your friends, family, neighbors and newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit because hype has already inflated the price.
We don’t necessarily advise becoming contrarian, i.e. those who believe that crowds are always wrong and look for opportunities to invest against the prevailing trend. Instead, we strongly encourage an investment strategy that is based on objective research using the best information available, calculated choices, a realistic assessment of risk, and a determination to avoid emotional decision-making.
3) Remain flexible and diversified
In today’s volatile markets a successful long-term investment strategy can often benefit from flexibility and proper diversification. Diversification is one of the pillars of modern investment theory and can be a powerful tool to reduce certain types of risk in your client’s portfolio. Be sure that your client’s portfolio contains a variety of quality investment types, including stocks, bonds, international securities, and a few alternative investments if your risk profile and investment goals support them.
4) Buy value, not market trends or the economic outlook
Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals.
While economic trends can exert a powerful effect on market movements, the stock market and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that economic outlook is unimportant. Over the long term, market movements often foreshadow economic trends as investors attempt to “price in” how they expect the economy to affect stock prices. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks out high-quality individual investments.
5) Take the right amount of risk
Experience and research has taught us that investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly. Although there are many different types of risk, when discussing portfolios, we generally are referring to systematic risk: risk that affects markets as a whole, such as recessions and wars; or unsystematic risk: risk that is specific to individual stocks and securities that can be addressed through diversification.
6) Learn from your mistakes
The words “this time is different” are among the most costly words in the history of investing. One of the key differences between successful long-term investors and those who are not, is that successful people learn from their own mistakes and commit to never making the same mistakes twice. Even when a mistake results in a large loss, take a step back to review the actions that led to the loss. Don’t compound the errors by taking bigger risks in an effort to recover clients’ money. Determine where you went astray and take steps to ensure that you avoid the same mistake in the future.
Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will confront the challenges of overcoming fear and greed. Fear can cause you to run for the exits when markets decline or your portfolio takes losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big score. However, by recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline.
7) Aggressively monitor your client’s portfolio
When markets are rising and amateur investors are doing very well, it’s easy to forget that protecting your client’s assets during declining markets requires skill, discipline and constant attention. No market rally is permanent and no decline lasts forever, meaning that there are no investments that you can buy and forget about. The pace of change of today’s markets is too great for you to be complacent.