A close friend recently asked me about whether he should hire a financial adviser. He has a decent chunk of money to invest, but doesn’t know how to proceed. The recent market turbulence and global political uncertainties are not exactly helping either. So the first question I asked was what was he looking for in an adviser?
This seemingly innocuous question ended up creating a long conversation, prompting many additional questions. His goal was to find a simple solution where he could put his money in a bunch of funds and ETFs. He was then hoping that he could forget about it while expecting that it grows nicely over time with little risk.
Unfortunately, that’s not how investing works. Markets change all the time and just like a business, portfolios may need to adapt to stay relevant. A good adviser can help you navigate through these “sharks infested waters” through sound portfolio management and regular reviews. But in the end, this is your money, so you are the Big Boss and you must take ownership. Don’t delegate decision making.
You Are the CEO, so Act Like One!
Your investment portfolio will (hopefully) grow nicely during your lifetime. Along the way, it will also serve its many purposes: fund your retirement, pay for your kid’s education, purchase a vacation home, or perhaps buy you an exotic African safari. The point is, no one else cares more about your portfolio than yourself. As far as Portfolio Management Inc. is concerned, you are its founder and its Chief Executive Officer. Start by accepting this simple truth.
The market is a complex system and is ultimately a game of risks and rewards, of probabilities and statistics. Just like any chief executive in business you constantly deal with unknowns and uncertainties. This implies that good and bad decisions are made all the time. Your objectives as a CEO is to make sure you keep the number of bad decisions to a minimum and that any bad mistake can be recovered from within a reasonable time frame. Competent CEOs make sure their company won’t die from bad decisions. Similarly, you don’t want to suffer major portfolio damage during a Big Bad Bear market.
Be a Competent Portfolio CEO
While avoiding major mistakes is key to survival, you also want to stay ahead of the game. Just like a CEO, this can be achieved by striving to improve your investment decision making process and learn from your mistakes.
Competent CEOs have many important traits that help them get better at their job and improve their decision making process. I will cover many of these in future blog posts. Perhaps their single most important trait is their ability to take ownership of the business and all of its issues, good and bad.
Competent CEOs Take Charge
CEOs are the leaders of their business. They stay on top of their business challenges. They take ownership. They do their best to make intelligent, well-informed decisions. They also own their mistakes (sometimes publicly), and figure out plans to fix them.
In a portfolio context, this means you must be proactive and stay on top of your investments. It also means you need to ask lots of questions. You must also accept when you made a bad decision and, if needed, change course when you are wrong. Note that the infamous “invest with benign neglect” or otherwise known as “invest and forget” approach that many investors implicitly assume can be quite risky and deceptive. Think about it: would you work for a company where the CEO doesn’t show up to work for months at a time? Probably not. Similarly, make sure you show up and you stay on top of your investments. Take control.
Being proactive and showing up does NOT mean to trade frequently (unless you are a trader as your business). Turning over your portfolio too often is like a CEO who reorganizes the business every month. Sometimes major reorganizations are needed. Sometimes the very survival of the company depends on such major reorganizations (think of massive layoffs during a bad recession). But by and large, staying the course is what really matters on most days, weeks and months.
Staying on top of your portfolio does NOT mean to watch the market daily. The S&P 500 does not need to retire or pay for your kid’s education. The market is not your portfolio. Your portfolio is your portfolio. You should not care what the market does every day. What matters is how your portfolio is expected to do in the future, especially during market stress events (bear markets) as well as happy market events (bull markets).
Being proactive and staying on top of your portfolio means to understand exactly how it will behave during these types of events. It is especially important to understand its expected performance during extreme market stress events. How will damage control happen? Is your portfolio well diversified with uncorrelated assets or strategies? How will you recover from the inevitable damages. Back-testing, if done well and without over-fitting, can also provide insights into real risks even though it’s imperfect.
Understanding this is far easier to say than do, and I cannot overemphasize their importance. Yours truly has learned this life lesson during the dot-com crash of 2000-2003, and it was a painful lesson that personally took me years to recover from. It wasn’t fun.
So be in control, take charge of your portfolio and understand what you’re investing in. Challenge your portfolio and its risk/reward characteristics. Be critical and consider market stress scenarios. Take the time to learn and improve your investment decision making process. Your future self will thank you many times over.