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The best investment strategy - Measure Twice, Cut Once

Measure Twice, Cut Once – The Best Investment Strategy

Curt Stowers
December 13, 2024
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Messages Worth Repeating

So much of successful investing comes down to attitude and discipline. You have to recognize that near-term variation is unavoidable, and sticking with your plan is mandatory if you want to maximize the probability of a successful outcome. That’s why I continually “bang the drum” on so many things.

At the top of the list is developing and implementing a well-defined Investment Policy Statement (IPS). This roadmap combines your goals, cash flows, asset allocation, and expected returns into a single document that will guide you through both the good and the bad times of investing. While not 100% certainty, it’s highly unlikely that an investor will succeed without a written IPS they actively follow.

Keep it simple -your IPS doesn’t need to be complex. For instance, any of the following strategies could work (although I’m not necessarily advocating them):

  • Putting all 401(k) contributions in a target date fund.
  • Following the “dogs of the Dow” strategy and executing every year on the second Monday the market is open.
  • Investing solely in an S&P 500 index fund.
  • Allocating 60% to an S&P 500 index fund and 40% to a Barclay’s aggregate bond index fund.

Which One?

So, if any of the above will work, how do you decide on which one you should follow? In my mind there are three criteria you should use:

  • It must “feel good” and make sense to you.
  • It must be backed up by facts and data.
  • It must be something you can explain.

These three criteria are rock solid in my experience.

If these options could work, how do you decide which one is right for you? Use these three criteria:

1. It must feel good and make sense to you. If you don’t feel your strategy, you’re likely either (i) not going to stick with it or (ii) constantly worry about it. Neither is helpful. Your strategy must provide comfort and confidence.

2. It must be backed by facts and data. Let the data tell the story. Don’t buy into what the financial press is selling. There’s always a “hot stock tip” or “killer trend,” but rarely do these have statistically significant evidence supporting them. Many investors fall for these distractions, often with poor results.

3. It must be something you can explain. If you don’t understand your strategy, you shouldn’t invest in it. Complexity for the sake of complexity is a recipe for disaster. Even if a strategy feels good and the data looks promising if you can’t explain it clearly, move on.

A Recent Trend

Recently large companies have been on a tear in the stock market. See the chart below:

Prior to viewing this chart, many have concluded that the small-cap asset class is dead, as the big companies have been on top lately.

Could they be right? Perhaps. But (i) this does not pass the sniff test for me and (ii) the long-term data suggests otherwise.

Does that mean that small-cap stocks are the place to be? Not necessarily! The key is this:

  • IF your IPS has a place for small-cap stocks, you NEED to have them/use them. And, IF your IPS has a place for large-cap stocks, you NEED to have them/use them as well.
  • Stick with the process until you have solid data that something fundamentally has changed. And remember that fundamentals do not change often!

Take your time and check out the facts. Talk to others. Do the research. THEN develop and implement a plan. Your financial future is too important to act impetuously.

Would You Like More Support?

  • If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?

If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.

Photo credit: rawpixel.com

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