Pacing Your
Portfolio for a Marathon
Procedural Investing vs.
Emotional Investing
While in my 20’s, I ran
marathons. At the beginning of one of my first marathons, I got caught
up in the excitement and exhilaration of the runners around me and let
my feelings dictate my pace. As I crossed the halfway point of 13.1
miles, I began suffering intense cramps. At that point I realized my
emotion-driven pace during the first half of the race was a huge mistake
and I would pay a long and painful price over the remaining 13.1 miles.
During the second half of the race, literally thousands of runners, whom
I had left far behind in the first few miles of the marathon, passed me
with relative ease as I struggled in pain. I was unable to finish the
race due to a stress facture in my foot caused by my early aggressive
pace. The fundamental mistake: ignoring my strategic long-term pace.
Much like the
excitement when the starter’s gun fires at the beginning of a marathon,
the constant parade of “get rich quick” investment schemes appeals to
our emotions, tempting us to ignore our vitally important long-term
plans. In the late 1990s, many investors got caught up in the euphoria
of technology stocks and other speculative investments that were
rocketing ahead of diversified portfolios such as those engineered by
TMG. Sadly, just as I collapsed and was unable to finish that marathon,
many investors will never recover from the losses they incurred. Like
me, their decisions were driven by emotions rather than a disciplined
long-term game plan.
The bear market in 2001
- 2003 should have served as a painful reminder for everyone that
markets go down periodically. Amazingly, many publications are again
engaged in the same sort of speculation and market timing that
previously devastated the hard-earned savings of so many people. For
example, financial magazines regularly tempt readers with sensational
headlines like: The Top Ten Stocks of the Future or Five
Mutual Funds You Must Own Now!
While no one can
predict the future, there is no question that the up and down cycle of
the markets will always be a part of investing. In fact, with the
advent of 24-hour trading and nearly instant global communications,
market volatility has noticeably increased over the past decade. As a
result, an important key to the success of any long-term investment
strategy is a superior investment policy coupled with the patience and
discipline to stay the course. Investors who lack an investment policy
often react to short-term events or market trends based on emotion.
Strong investment policies allow investors to make disciplined decisions
based on carefully researched investment principles and procedures that
focus on long-term success.
The late Malcom Forbes
was well known for his comment: “With all thy getting, get
understanding.” Investors understand the concept of buying low and
selling high. But the emotional side in all of us tempts some investors
to be more aggressive during bull markets and more conservative during
bear markets. What does that actually represent? Being more aggressive
during a bull market means shifting dollars into equities while they are
up (buying high). Responding with a more conservative portfolio during
a bear market results in shifting dollars out of equities while they are
down (selling low).
Procedural investing is quite different. The
investment policy includes target weights for the asset classes in your
portfolio. These targets are maintained with a rebalancing
strategy - a highly disciplined form of buying low and selling high.
During the most recent bear market, instead of selling equities while
they were down, we rebalanced portfolios, selling fixed-income
investments while they were up and purchasing equities while they were
relatively “cheap.” This discipline is a critical aspect of any
successful long-term investment plan.
Just like clockwork, during down cycles in the market, all sorts of
hucksters come out seeking to take advantage of investors’ fears and
frustrations. Some of you may have received phone calls from such
people. They all have a “sure thing” that is supposedly the answer to
all of your worries. The trend is sad but predictable. These schemes
never go away because they take advantage of something that never goes
away - human emotion. The same “no lose propositions” arise during up
cycles as well. The only difference is the con artist is preying on a
different investor emotion - greed rather than fear.
*****
Ken Robinson is a Senior Planner of The Monitor Group, Inc., a fee-only financial planning firm located in the Tyson's Corner area of McLean, Virginia. As a nationally recognized wealth management firm, The Monitor Group provides investment and financial planning services to more than 190 high net worth client families in Northern Virginia, Maryland, Washington, DC and across the country. Click
here for more information about Ken and The Monitor Group, Inc.
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