Do you have a written investment strategy?

It is not news that most ‘investors’ do not have a thought through investment strategy. Asking for a written one is a far cry.

In good time, you would agree that your investments continue to be random acts driven by popularity, hearsay and need to just get the best returns.

The same randomness is equally visible in the not so good times. Stop systematic investments, sell current investment due to panic or take a vow to altogether avoid any market linked investments are some examples of these random acts.

If you were to ask me the difference between having a strategy and not having one, it would be that an investment strategy helps you stay the course. You know why you are doing what you are doing.

An investment strategy holds your investments together and hopefully, you too.  It keeps you sane. It is difficult to waver a mind that understands the ‘purpose’.

Call it a set of road rules in your journey of financial independence.

What is an investment strategy like?

The investment strategy is a set of guidelines that direct your savings towards investments in a way that help you meet your financial goals.

I am sharing with you the investment strategy for one of my client’s – let’s call him Bruce Lee.

If you wish, you can use it to create one for yourself too.

Remember to write it because the simple act of writing creates commitment in your mind.

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Investment Strategy of Bruce Lee

Objective:

The objective of this investment strategy is to help me meet my 3 key life and financial goals.

1. Fund my house purchase over the next 3 years
2. Create a corpus for my retirement due in 25 years
3. Fund my 2 children’s education due in 14 and 17 years respectively

Asset Allocation

One of the over–arching principles that I have decided to follow is that any investment that is to be done for over 5 years should be done in equity. This provides the investment an opportunity to benefit over time from growth in underlying businesses as also add substantially to the purchasing power of money.

Within the asset class, I will build a moderate risk portfolio to reflect my risk preference. The preferred vehicle to invest in equity would be mutual funds.

Investments for the short-term needs, where money is required in less than 3 years, should not be subject to volatility of the market or come under liquidity pressures. The choice of investments will be fixed return instruments or debt mutual funds.

This also means that as and when goals are less than 3 years away, the equity portion of the money should be transferred to debt funds or fixed income investments such as Fixed Deposits. This will ensure that money is readily available to provide for the financial goals.

What to invest in:

My investment portfolio would be diversified across asset classes – again driven by the financial goals and time horizon.

From a stocks and mutual funds perspective, I will invest in various styles and across market capitalisation with proven and consistent fund management teams. I could also give chance to new investment ideas and opportunities but only after thorough evaluation. In any case, my portfolio will not exceed more than 5 funds.

Overall, I will choose simple, understandable, transparent and low cost products to work for your financial goals.

In case of mutual funds, I have outsourced the money management job to the fund manager and I will let him/her take the calls for identifying specific business opportunities that make sense from an investing point of view.

When to invest:

When to invest will also be primarily determined by the availability of funds with me.

Since I have a significant amount available today as lump sum, I will direct it towards the identified investments. Over the next several years, I will use systematic investments to channelise my regular savings into the same investments.

Any attempt to time the market is a strict no-no. I recognise that “it is not market timing but time in the market” that will compound my investments and grow my wealth.

Review of the investment strategy:

How often would I revisit my strategy?

From the financial plan point of view, I will review the plan every year and assess if there is a change in the financial goals, cash flows or career situation to warrant a change in the strategy.

Every year, I will also review the specific investments that I have made to see if they continue to be fit for the investment strategy. Unless there is a consistent underperformance or a change in the structure of the investment, I will continue to hold on to my investments.

The fact that markets will go up and down would absolutely not be the reason to change the strategy. I understand that volatility is the nature of the markets. This fact has been already captured in defining the returns expectation in the financial plan.

If I do feel panic, I will not take any action without talking to my investment advisor.

 

Signed

Bruce Lee

Note: Take a print, sign and make it the top sheet in my investments folder. Send one copy to the investment advisor.

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Between you and me: What is your investment strategy? Do you have a written one? Are you writing one? Do share your thoughts and feedback in the comments.