How do they do it? How do successful, wealthy investors manage to make money every time they invest and thereby amass their fortunes? The short answer is they don’t! No-one, not even the savviest investor, can always profit from all their investments. But the longer answer is that successful investors are always looking at the bigger picture to ensure that their specific investments are in line with their overall plan. Even losses can be considered part of the process that ultimately leads to their success.
As an investment manager I would love to be able to state with authority that I can constantly and without fail maximize my clients’ gains. But unfortunately I can’t, and anyone who claims they can is deluding themselves and their clients. What everyone does need to do is ensure that their investments are fully in line with their long-term investment plan. In fact, possibly the best bit of advice I can give is to encourage everyone emphatically to have such a statement in place. Successful investors have a plan which they assess periodically and change if necessary, in order to help them reach their goals. They stick to their plan during the ups and downs, and so must everyone else. And that is the key to their success.
How to set up an investment policy plan
The current long-running bull market can reverse itself at any time (and might have already started that process during a very rocky October in worldwide markets). It is really frightening to suddenly see the value of your investments drastically reduced, and the knee jerk reaction is to prevent yourself from further loss, and pull out. But that impetuous act can actually cause a much greater loss in the long run. Your investment policy plan may not ensure that all your investments constantly offer you the highest returns, but it will guarantee that your investments are in line with your long term values, and prevent impulsive actions which will have negative consequences.
Whenever I discuss investment risk profiles with clients I will often ask a client what they did with their investments during the great market collapse of 2008. Usually I find that those clients who panicked and sold all their investments when the markets started tanking did not understand market risk, and did not know what to think about its impact on their long-term investment choices. Those with a plan of what they were trying to accomplish used that vision to stay strong and ride out the bumps along the way.
Your investment policy plan should ideally be on paper … or screen, but saved somewhere and reviewed as your situations and goals change, and must contain the following elements.
Short, medium and long-term investment goals should all be itemized. What are you trying to achieve with your investments? Grow them quickly at high risk, save for retirement, or put money away for your kids? Will you need liquidity for an upcoming simcha, or are you able to invest and lock up your money because you do not expect to need the money for decades?
Investment guidelines should contain the types of investments you are willing to consider along with the risk factor. There are many different types of investments – from ultra-safe bonds to high-risk startups. And within each investment your risk element needs to be categorized. If you are working with an investment manager you must discuss your preferences so that your specific portfolio can be created. Keep focused on the big picture to ensure your investments are set up to match your risk profile and avoid a panic attack even during a market downturn. Work together with your manager to ensure that both of you are clear about all your goals. If you are doing it alone, I recommend involving your spouse, friend or family member to review things with and help you get clarity.
That way whenever the market falls, which it will do at some point, you can have the confidence to sit tight in the knowledge that you are working within your plan. Successful investors work with the markets, assessing and adapting their risk types and exposure depending on their long-term plans.
International citizens with investments in different countries have additional considerations including currency exposures, country risk and tax considerations among other issues. And if you have international accounts you need to ensure that you can access whatever funds you need, when you need them … something which is becoming increasingly complicated with new tax and money laundering restrictions.
The drawing up and reviewing of your investment policy plan is your key to becoming a successful investor. Use it! It won’t remove the unknown element of the vagaries of the financial markets, but it will empower you and give you confidence to ensure that you can handle instabilities and crises in the money markets. And that is a secret worth sharing.