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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Resolve to find a sensible balance that reflects your values. They will keep you safe and sane along the winding road of investing.." |
Vancouver, BC (December 4, 2006): Over time, investors encounter bulls, bears, market tops, bottoms and everything in between. Not to mention unpredictability. So, what can they do to maintain their wits while managing the choppy seas of investment portfolios?
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, “Accumulating and preserving wealth works best on logic, not on emotion. A few principles to rely on keep investors sane most times. My goal for managing wealth is to be right more often than wrong.”
Author Doug Larson once wrote, "Wisdom is the quality that keeps you from getting into situations where you need it."
Investors can relate with this insight during their investing lives. It's a good practice to periodically question one's wealth management strategies. What's working and what's not. For me, they keep perspective along the winding road. During the best and worst of times.
I'll outline my 10 principles to manage wealth. They create personal investment philosophies for the long run. Beliefs to keep trouble at bay during market downturns and upturns. Fundamentals to shape a well-designed game plan. Fibre to manage by. Perhaps, even sprinkle some fun into investing.
My first 7 principles are the core beliefs. The heart of the matter. The last 3 are satellites. Investors have more leeway to customize them. All 10 contribute to building rock-solid portfolio foundations.
Think of them as the roots of a fruit tree that you plant. They absorb the nutrients from the soil so that one day your tree will bear fruit. Here are the underpinnings of my approach to manage wealth:
Core principles
1. Long-term patience: There is a right way and a wrong way to invest. The right way allows time to work its magic for each investor. Get in the habit of asking where you want the portfolio to be in 5 to 10 years. Not in 3 to 12 months. Short-term investing is speculation.
I'm reminded of the children's story "The Tortoise and the Hare". The hare's speed and agility are nice. Yet, investors need stamina, consistency and, above all, lots of patience. Like the tortoise. Think in decades, not in months. Always bet on the long-term. Never lose sight of what's important to you.
2. Determine expectations: Focus on what you want the nestegg to provide in the long run. Confirm that your goals are reasonable and you’re on the right track. Estimate the portfolio size required and the rate of return to get you there. This is your portfolio yardstick. Not what markets do.
Asset mix has the biggest impact on portfolios. Choose a sensible mix so that the holdings don't all move in the same direction. Focus on both capital preservation and long-term growth needs. Keep trading in check and don't go overboard on rebalancing.
3. Identify the investment profile: One pillar of investing is to identify your correct investment risk profile. Then to stay invested within it. Your profile determines the amount of investment risk you are willing to shoulder. It allows you to seek reasonable returns while still sleeping comfortably.
Wise investors care about risk. Novice investors shop for returns. Portfolio prudence considers risks first, returns second. Returns will eventually reward investors who focus on investment risks. Risks will eventually catch up to investors who focus on returns.
4. Diversify, diversify, diversify: I'm passionate about diversification. Make it your best friend. A well-balanced portfolio is spread among major asset classes. Such as equities, fixed income, cash and real estate. Large and small companies. Domestic and global choices. Some will disappoint.
Years of portfolio growth can be wiped away by one bad year. I like to own a piece of the rock all around the world. In tax-friendly, quality investments. Every portfolio has leaders and laggards. Don't make single bets that can bite hard. Diversification is the best medicine to manage nasty surprises.
5. Buy value and growth, sell sizzle: Value investing can be the cornerstone of long-term growth. However, it requires a holding period of at least 5 to 10 years. Dividend growth adds value over time. Another strategy is that neglected sectors may offer good growth prospects.
Investing in popular stuff can be exciting, but has a low percentage of making you a profit. As the saying goes, buying an investment is best when it has few friends. Consistent return is more important than racking up the occasional investment home run. If your portfolio has sizzle, sell it when it's hot.
6. Try to avoid large losses: This is the hardest task for investors. Never confuse the price paid with what ought to be done with a sour investment. Every loss begins small, but many investors seem to have the pressing need to be right. When hope is all that's left in the investment, it's time to exit.
Falling in love with your investments impairs judgement. As they say, rising tides raise all ships. So, analyze the tides, not the ships. Don’t sit idly by hoping to be right. Instead, do the right thing and snip the losers. Take the awful medicine early and swiftly. Halt the bleeding and move on.
7. No would've, should've, could've: Looking back and dwelling in the rear view mirror is emotionally draining. Wise investors don't second guess. Especially right after buying or selling. Always expect the unexpected. A positive mindset is best for making long-term portfolio decisions.
Astute investors make their decisions with available information. Lingering on the would've, could've, and should've is counter productive. Don't get distracted with the outcome of single picks. No obsessing over the daily roller-coaster rides. Stop dwelling on the past; start focusing on the future.
Satellite principles
8. Save and invest over time: First save enough regularly. Then take your time. Investing can span from age 30 to 90. Maybe longer. So, remove the pressure of the decision as to when to buy. There is no need to be fully invested all at once. Investors can take their time to acquire their mix of assets.
Say over a year or two. Perhaps, buying steadily like monthly, bimonthly or quarterly. Having a few entry points into the markets is a sensible approach. If you don't like what you see, take a break. Sit it out for a while. Perhaps, move some funds to short-term cash instruments.
9. Fund the rainy day: Set aside 3 to 6 months of expenses for emergencies. Job loss, illness, disability and accident are good reasons to dip in it. Make sure that the emergency money is at an institution that has not loaned you money. Funding the rainy day is a form of insurance.
The investment portfolio is not required for a rainy day. It's money you may be able to put at risk. There may also be a need to insure life, health, property and earning power. It's part of arranging an appropriate safety net around yourself.
10. Buy and hold is not the only answer: Buy and hold strategies are wonderful. Just remember to periodically monitor your holdings. Examine why you still hold them. Assess their future prospects. Take swift action as necessary. If equities don't seem cheap, stand aside until you're comfortable.
Bear markets begin in good times. Bull markets begin in bad times. If you don't understand what you're buying, don't buy. Either make an effort to know the investments or stroll away until you do. It's difficult to grasp everything so, for comfort, stay mainly with what you know.
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I've presented a concise set of principles to guide your wealth management needs for the long run. Know the ones that work for you and when you’re straying from them.
Occasional tweaks can be made to better fit the economic environment of the day. However, don't abandon the core principles. You'll pay the price.
It's getting close to that time of year when resolutions take the spotlight. Many about investing.
Resolve to find a sensible balance that reflects your values. They will keep you safe and sane along the winding road of investing.
The ones you adopt should become part of your investment policy statement. Better known as your game plan.
You can rely on them during both good and bad times. May your tree bear plenty of fruit.
I welcome your questions comments and opinions.
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