When it comes to formulating investment management strategies, prudent investors should first realize that certain aspects of their investment journey are uncontrollable. This includes the unpredictable ways of the market, the emotive responses to market changes leading to volatility, and future trends of the market and the underlying economy.
With this realization in mind, prudent investors need to look towards developing strategies that make the most of what they can, in fact, control. So in this article, we will discuss the Six ‘P’s’ of prudent investment management and attempt to essentially establish a foundation for investors to work on.
Every investment management institution has a set of values and principles upon which it makes its decisions. Similarly, every investor too has a particular rationale behind their investment decisions, whether they be conscious about it or not. This doesn’t necessarily imply that those investment principles are correct or not.
Hence, investment strategy and management must be rooted in a set of values, beliefs, philosophy, and principles that allow it to serve the purposes of the investor most adequately.
At RVW Wealth, we emphasize creating personalized investment portfolios. This means that portfolios are constructed around the needs and long-term financial goals of the particular investor.
Alongside this, it considers the unpredictability of the market with regards to the risk that an individual investor is willing or able to give to the market. Hence, a founding principle of most wealthy firms is their personalized portfolios.
In addition to this, we practice portfolio diversification, regular rebalancing, disciplined investment, updated capital market assumptions, and efficient methods of taxation. These beliefs are implemented through a wide array of asset classes and mutual funds within portfolios of a globalized nature to ensure diversity and the adoption of methods such as tax-loss harvesting, asset allocation, and municipal bonds to ensure tax efficiency.
Hence, it becomes clear that any investment management requires a set of foundational principles that ensure sound and rational investment strategies and decisions. It allows the investor to look beyond the emotions of the market and look towards utilizing those emotions towards rational financial goals.
Any successful investor needs to have a long-term picture of their financial goals and the sustainability of their investment portfolio. Now that the principles of investment management have been laid down, it is important to use those principles and apply them to the needs and circumstances of the individual investor.
First, it is important to create a model for the individual investor based on their risk tolerance, financial goals, age factors, etc. According to these parameters, a model can be created for asset allocation, emphasizing capital preservation, income or aggressive income strategy, and growth or aggressive growth strategy based on the parameters created.
Now that a model has been set, the investor can look towards different firms or management advisers, which can help them suitably accomplishing the goals laid down by these models. This is required to aid the investor in deciding the extent of diversity within their portfolios along with stocks and bonds and the type of fund within which they should invest.
We implement this by investing in a basket of exchange-traded funds that invest in globally-diversified securities that creates a diversified portfolio that isn’t reliant on a concentrated number of securities.
The long-term picture of an investor goes hand in hand with the preferences of the investor. These are important to know since they also help set the foundations for the personalization of a portfolio and are consequently quite essential in creating an investment strategy that is prudent and effectively managed.
To understand preferences, investors need to relate their financial risks to their financial needs. Younger investors are primarily concerned with amassing greater wealth through capital appreciation and growth, and this usually means that they require greater investments in diversified stocks and the equity market. Therefore, investments for younger investors will typically have a growth objective with an asset allocation that can be described as aggressive.
On the other hand, older investor will typically be much more concerned with having a stable source of income. If this is the priority of an investor, then they would allocate much of their portfolio to bonds and bond funds. This would mean that they adopt an income-based strategy that mainly relies on a stable income, credit quality, and average maturity. With this said, stocks should still have a prominent role in portfolios for many clients, with 50% or more of a portfolio in equities.
These are the two extremes of preference, and there is a lot of middle ground to cover in between. However, what these preferences do is that they create a disciplined approach to investing, which does not rely on human emotions and aimless speculation. Instead, it ensures that the portfolio reflects the needs of individual investors and allows them to rebalance the portfolio to these requirements instead of falling prey to short-term greed and volatility.
What distinguishes a disciplined investor from that of an ordinary investor is that the former does not rely on human impulse and emotion to make hasty decisions that can be counter-productive in the long run. Of course, when capital is at risk, human emotions tend to supersede rationality in dictating investment decisions. However, this can lead to financial ruin and is not an attribute worthy of being categorized under a prudent investment management strategy.
What is required from the investor then is a level head through a long-term financial plan which can mitigate these psychological impulses and help the investor weather hard times and keep a level head during good times.
If this isn’t done, then the investor can fall prey to greed and not rebalance the portfolio during financially stable times. Similarly, the investor may panic and sell off their securities if they experience a fall in value, not giving those investments the time or opportunity to recover.
If a portfolio is selected through rational planning with the help of financial advisers and through an analysis of historical performance and precedent, there is an assurance to the investor which enables them to keep a cool head when the market unravels in its unpredictable trajectory.
Of course, an investor should also remain optimistic in the portfolio that they have created through this rational planning. This means that they have an optimistic trust within the external forces of the market that are at play and that affect the performance of the portfolio.
This implies a trust within the power of the free market to create wealth, freedom, and innovation despite the ups and downs of the stock and bond market. The general trend of the economy is upwards, and so it would ultimately pay off to take risks, provided that these are taken in a rational and sound manner.
This is perhaps the most important component of an investment management strategy. Now that you have used the tips given above to formulate a well-thought-out investment portfolio, you can’t just expect high returns and low risks to appear to you as if out of thin air.
In reality, you need a disciplined team of financial advisers and management members who can aid you in the constant supervision and development of your investment management through a thorough process of consultancy and analysis.
This process involves a whole host of various factors which need to be monitored constantly to ensure that the investment portfolio not only adapts to the conditions of the market and the changing needs of the investor but also accommodate the changing nature of the portfolio itself and the challenges that brings about in terms of creating tax efficiency and diversity through rebalancing.
The processes that the management team needs to concern itself with include, but are not limited to tasks such as tax-loss harvesting, customer support and service, portfolio rebalancing and maintaining diversity, investment reporting, and regular analysis of market trends and analytics, which provide new information that can help with portfolio decisions.
A good investment management strategy would ensure that the portfolio is not outdated; this means that it must adapt to the changing circumstances and trends of the market whilst keeping its long-term financial goals in place. This is, as has been detailed above, only possible through a team of effective financial advisors that can execute the processes required to regulate a portfolio.
Performance is a metric to judge how well the processes mentioned above are being carried out. They are essential to any prudent investment management strategy since they provide a measure to evaluate how inline the portfolio is with its financial goals and ambitions. If the performance of a portfolio isn’t as expected, this is as much of a problem as when the performance of the portfolio surpasses the expectation by a lot.
Both these instances relay to the investor that the managing team is not going by its stated path and is making decisions that concentrate the portfolio leading to volatile results, and this necessitates monitoring and reevaluation of the team of financial advisors enlisted to manage your portfolio.
At the end of the day, investment strategy is not a cakewalk, nor is it a hobby, and it can’t be left simply to the managers to supervise your wealth and assets.
This tip obligates the investor to remain connected with the process of the development of their portfolio, and hence ensure that the team they enlisted in doing its job correctly and sufficiently, and also to ensure that the investment strategies themselves are being followed.
This monitoring of performance also allows the investor to reform or change certain aspects of the portfolio in line with ways that better reflect the changing financial needs and circumstances of the investor alongside an adaption to the changing needs of the market.
With all of this said, keep in mind that performance is not the only metric to judge the effectiveness of the portfolio. In fact, it is recommended that the investor take a sound understanding of all the various facets of their requirements and take performance only as a component within their overall evaluation of how well the portfolio is performing.
As we can therefore now conclude, tips to prudent investment management require taking control of those things which an investor can possibly change within the context of the unpredictable market.
Keeping all six of the “P” attributes in mind – Principle, Picture, Preference, Psychology, Process, and Performance – will enable an investor to create discipline within his or her investment management strategy. Such discipline is absolutely pivotal to creating a portfolio that is rational, sustainable, long-term, and personalized to the needs and wants of the individual investor.