What is the right investment strategy for you?
27 September 2019
“The greatest single edge an investor can have is a long-term orientation.”
— Seth Klarman
What is the ideal investment strategy? What shares are good to buy? Isn’t a recession coming soon and therefore I should be selling out of everything to hold cash? Am I supposed to hold cash? Some friends buy REITs (real estate investment trusts) and it pays a good dividend, so should I also be doing that? How about my foreign currency risk – how do I hedge it out?
These are some thoughts often thrown out by the financial media and well-meaning friends and family who tend to confuse the means with the ends. Far too often, we try to apply the answers to other people’s financial problems to our own situations, without giving it too much thought. In reality, the only answers should be, “it all depends”.
Let me share an example. Recently, I had a conversation with a group of friends about the property market. One mentioned that he had recently bought a “perfect home” on a high floor in a new waterfront development. He loved the view, cool breeze and tranquility, as it was far from the satellite town center. However, as I thought about what he said, I actually grimaced internally. For one, I dislike wasting time travelling, and prefer my home to be as near as possible to a transport hub and amenities like shopping and food. And what about that high floor with a view? I thought of all the possible worst case scenarios where a pet or child might climb over the balcony and plunge to their deaths. To me, his dream home was my worst nightmare!
The same principle applies to investment portfolios. What works perfectly for someone might be completely wrong for another person, as everyone’s personal financial situation and parameters are different. Go to cash? Sure, if you have a dire need to fund a big purchase in the immediate future. How about holding investments like REITs? Only if you understand how this property proxy works in different economic cycles and how it can help fund your retirement income.
Ultimately, the “right” strategy will depend on your personal financial objectives, your current financial situation and your sensitivity to the risks you need to take.
As fiduciaries, this is the main reason we find it helpful to show investors how returns are distributed and the range of possible outcomes they can expect, using as large and as comprehensive a set of historical data as possible. This provides perspective as to how an investor can reach their goals, and what can happen along the way. However, knowing the path of your journey is half the battle. Knowing why you are on the path and what is at the end of the road is the other half.
At the end of the day, listening to so many different ways of investing only serves to confuse. Each individual differs and varies in countless ways, from circumstances, risk appetites, attitudes, values and goals. Not only do we differ from person to person, each of us will also change over our lifetime. That is why a wide range of solutions is required to match the varied investment parameters of different people. We will also need to continually reassess the selected solution for each individual as they move through life, making changes as and when necessary.
In conclusion, we would like to share with you this short video (about 1 minute) from famed Nobel Laureate Eugene Fama, who discusses two important steps in investing: knowing why you are investing, and understanding risk.
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