Investing for the long run
Every day you read headlines about this or that big story moving the markets. How do you make heads or tails of it?
The first step of managing your finances is to have a financial plan. When it comes to translating that into a successful investment strategy there are a few factors you need to consider.
First and foremost, a prudent long term strategy is not just about striving for returns, it is about risk management. Step One in risk management is diversification but the term is so widely used to justify almost anything that is crucial to understand the investment risk-mitigating implication of each investment and the risk-creating implication of the management complexity.
Secondly is to understand that successful investing is as much about managing emotions as it is about financial analysis. An investor can do all the analysis they want but if greed or fear take over, their strategy is worthless. Emotion is not just something that plagues consumers. Many a would-be investment professional can have all the formal financial training but not the temperament to be an effective investment manager.
In theory there are many different investment styles; some have more of a track record than others at success. To ensure emotions don’t get the best of you, an investment manager needs to first have a style with a strong, long track record, then understand that approach in full detail, then have experience implementing that style in good markets and in bad, then be willing to stay strong to that style through thick and thin.
Every style requires some sort of situational analysis. In today’s world of information overload there is plenty of “noise” that will spook the investing world at-large but needs to be filtered out by the investment professional who trains his sights on what is going to materially impact investments. This is never easy and even with substantial experience separating the wheat from the chaff is difficult. That is a large part of what the successful investment professional does.