Broker Check

My investing principles

May 17, 2022

When I meet with a prospective client I have a book that I use in case specific questions about concepts or principles come up.  In that book, I included my 7 principles for investment success.  During times of market volatility I’ll find myself going back to that book just to read through it and remind myself.  I thought it would be a good time to share with you as well.

  1. Have a goals based planning philosophy
  • I think this may be the biggest key to remaining calm in markets like we have seen in 2022. For example, if you have a retirement account, you are 40 years old and planning on retiring at 65, this market should not concern you at all.  You are probably invested relatively aggressively.  So along with the good times like the 2021 return, unfortunately there will be some pain like we are experiencing in 2022.  Any account you have should have a dedicated purpose.  This goes a long way in keeping you sane during the rough times.  Even if you have an account that you trade for fun, times like these may present opportunities for stocks you wanted to own that you couldn’t get into before.
  1. Time IN the market is more important than timING the market
  • Let’s be honest, 2022 has been brutal. We are in negative double digit territory in almost every indices and nobody is quite sure where the bottom is.  But suppose you decided you had enough on Thursday, moved to cash, and then missed the rally on Friday.  True, it might be one good day in a continued slide, but those good days matter in the overall performance of your portfolio.  This goes hand in hand with the message above.  Stick to your goals and understand your timeline.  I’ve shared this chart a few times over the year but I feel it bears reposting.  Positive days in these types of markets tend to be very positive.  As you can see missing some of those can really hurt you in the long run.

  1. Consistent Investing
  • If you invested money with me on January 1, 2021 you probably think I’m a great advisor.  If you invested with me on January 1, 2022 you may be questioning your decision.  That’s fine, one year does not make or break me as an advisor but I firmly believe that I provide my best advice in times like these.  2021 is easy, 2022 is not.  One principle I firmly believe in is moving money into the market at regular intervals can be key to an investment success.  Again, piggybacking off the topic above, trying to time the market is typically a fruitless endeavor.  Understand that markets move at their will, sometimes you may catch a good day like Friday with a monthly investment, see an immediate uptick and help the portfolio’s overall return on the year.  If you have the ability to add money on a monthly basis, I highly recommend it.  To use this year as an example, SPY (S&P 500 Trust) is currently trading at approximately $400 per share.  If you had put $10K in on the first trading day of the year you would have bought it at $477.55 and currently about 16% in the negative.  However, if you would have taken that same $10K and invested $2K per month on the first trading day available, you would have an average cost basis of $445.57.  It’s still a current loss but maybe a much more palatable loss
  1. Diversification
  • This has been a tough one to convince people of over the last decade plus. I’ve seen plenty of articles about the “death of the 60/40 portfolio.”  But the main issue has been the run on domestic growth stocks.  Any other areas of the market severely lagged over the last decade.  As you can see in this chart, large cap stocks have provided an average annualized return of 10.6%.  That is almost double the return of a traditional 60/40 portfolio.  So is diversification dead?  Last year you might have said yes.  If your portfolio on January 1st though was invested in FAANG then you might be rethinking that assumption.

  1. Consistent and timely rebalancing
  • Rebalancing subscribes to the theory of sell high buy low. In it’s simplest form, if you have a portfolio that is meant to be 50% stock and 50% bond, and there is a hot equity market to start the year, your portfolio can soon be out of whack with your risk profile.  Rebalancing allow us to take profits off the table and find other areas of your portfolio that may be lagging.  Over a market cycle, this could provide additional alpha.
  1. Tax loss harvesting
  • This may seem counterintuitive. I keep preaching to ride the markets even in bad scenarios.  However, in taxable accounts these markets can provide opportunities to capture capital losses.  Best case scenario, we are capturing a loss while also getting rid of a name we no longer wanted in the portfolio.  The bottom line is the IRS allows you to deduct and/or offset up to $3,000 annually in short or long term capital losses.  If you have more than that, you can carry those losses forward into future tax years.  So while staying invested is typically the write move, taking advantage of tax write-offs always plays
  1. Self-Completing Plan
  • Plan for the unexpected. You could be my best client on the planet.  Good income, no debt, consistent investor.  Sounds amazing.  But if you have not planned for an untimely death or disability you really have no plan at all.  I’ve been doing this for more than a decade.  I have seen it all.  I’ve seen what happens to families, I’ve seen what happens to children who have lost their parents.  If you haven’t planned for it yourself you are simply allowing stranger to make decisions for you about your own flesh and blood.  If you don’t have disability insurance, get it.  If you don’t have life insurance, get it.  Any advisor that’s worth anything will tell you the same thing.

These are my 7 principles.  I share them with all my clients and they are written right into my new client book.  As I said above, it’s good to re-read this when we go through times like 2022.  Are they always 100% correct?  No, but I have my plan and my beliefs and I’m sticking to it.