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Jun 1, 2014

Do You Have An Investment Strategy?

by David Ensor

David EnsorRecently, I finished reading “Strategy: a History” by Lawrence Freedman- a work that gives a wide-ranging overview of a concept whose signature word (derived from the ancient Greek word for a commander or general) has become so freighted with layers of meaning and (over-) interpretation as to have become capable of serving almost any cause and purpose. After all, any business has to have a “strategy”, even if it consists of mindless, parroted businessspeak thought up by some PR flack with half a brain.

Of course, there is not even any accepted definition of what the word now means! However, one that Professor Freedman uses in his Preface refers to “maintaining a balance between ends, ways and means; ...identifying objectives; and [identifying] the resources and methods available for meeting such objectives”.

I think that is a fairly decent starting point for thinking about the topic in the context of one’s investment goals and how to achieve them. So, to answer the question in the title: if you do not (yet) have an investment strategy, you should!

Such a strategy does not have to be complicated or elaborate: in fact, the “perfect” is often the enemy of the good, in this and many other contexts. The strategy should be yours; and it should be something that is realistic and achievable- not some product of financial fantasy-writing, in which “X Bank” or “Y Investment House” cajoles you into giving them your money so that they can (and will, of course) help you meet your goals, unqualified by any sense of reality or risk.

So, how should one go about deciding upon a valid strategy?

Firstly, information is a valuable and essential resource, you need to know as much about your current circumstances as possible and the environment in which you are operating. This would include your current investments, tax situation, realistic income expectations, and how much your cost base and likely obligations allow you to invest for the long-term (as opposed to save for the proverbial “rainy day”.)

Next, look deeply into yourself and assess your level of investment knowledge, as well as your risk appetite and ability to make what may be difficult decisions, without suffering from anxiety or regret.

  • Are you going to concentrate or diversify?
  • What is your time horizon?
  • Do you have the ability to recover from setbacks or market volatility?
  • Can you be patient if a decision with which you remain comfortable takes longer than expected to work?

Thirdly, decide whether you should employ formally one or more financial advisers- not the commission-driven sweet-talkers, but fee-for-service experts, with a proven track record who will act as staff officer(s) to help you implement your generalship.

Then, when you have marshalled all the necessary resources; identified your goals; and determined that they are realistic, even if a bit of a “stretch”, move forward to implement your strategy, never losing sight of the fact that, to paraphrase, a famous German general: “No strategy survives first contact with the enemy”. This does not mean that, if initial outcomes differ from expectations, you should immediately change tack, but it does mean that one should not continue with an investment approach or allocation that is demonstrably failing simply because it forms part of your strategy. Retreat or re-grouping is not an admission of failure, but evidence of mature judgement and a willingness to adapt.

Thinking strategically is not a magical concept, for which one needs advanced degrees and years of training.  Much of it is, in reality, based upon common sense and the simple ability to reason dispassionately and using relevant information and advice. Never allow yourself to be talked down to by some “expert”, who is probably nothing better than an overpaid shill. Those investment managers who know what they are doing tend to be self-deprecating and humble; recognizing that, whether they wish it or not, chance and happenstance can and will require the most “obvious” strategy or plan to be re-thought or replaced.

This article was intended as something of a written pep-talk. Having an investment strategy is essential to achieving your long-term financial goals; but its success, even if executed by others, depends on you, no-one else, you are the strategos, or general.

David Ensor,

Risk Consultant,