Why You Need an Investment System
Different people attend investment conferences for different reasons.
Some want a read on what lies ahead for the economy. Others want insights on the future direction of the market. Still others want, as one gentleman suggested at a recent seminar, "just one great stock."
But no one, not even professional economists, knows what the economy will do. Market timers might as well be hawking opinions on The Psychic Network. And while we all appreciate a superb stock recommendation, chances are slim that one stock will dramatically affect the timing or quality of your retirement.
So at The Oxford Club's Private Wealth Seminar at The Fairmont Le Chateau Frontenac in Quebec this week, I suggested that what every investor should really seek first and foremost is an all-encompassing investment system, one that will generate above-average returns in the good times and protect their hard-earned capital when things go off the rails, as they inevitably do from time to time.
(Never forget that every bull market is followed by a ferocious bear market, just as every bear market is followed by a rip-roaring bull market.)
Why is this so important? Let me go back to the beginning...
During 16 years in the investment management business, I would often have a prospective client ask if I could help him or her.
"I don't know," I'd say. "Let me take a look at what you're doing now."
When they showed me their portfolio, I generally saw a list of securities - bought at various times and prices - that didn't seem to have much in common.
In fact, they didn't. Folks would often tell me they read about this stock in Businessweek and learned about that fund from their golf partner or heard Jim Cramer talking about this promising IPO. Often times they didn't know whether the company was profitable or even what it did.
I called it investment by agglomeration. Because that's what it really was, just a jumbled cluster of investments put together with no real forethought, no particular asset allocation and no battle-tested buy and sell discipline.
Make Your Own Luck
Yet they were disappointed to find that they were having "no luck." And, indeed, luck is exactly what you'd need to succeed on such a path.
It still surprises me that some folks spend more time deciding which flat-screen TV to buy than how they're going to reach their most important investment goals. This presumes, of course, that they've even made investment goals.
To say "I want to be rich" or "I want to retire early" is just wishful thinking. "I want to have a $2 million net worth on my 65th birthday," now that's a goal. Whether it's realistic and achievable or not depends on how old you are now, how much you've accumulated so far and what investment system you're following, if any.
Let's say you do have a specific goal and it is reasonable. Then what? The next step is knowing The Only Six Factors That Will Determine Your Future Net Worth:
- The amount of money you save.
- The length of time you let it compound.
- Your asset allocation. (How you divide your investments up among stocks, bonds, real estate investment trusts, metals, etc.)
- Your security selection.
- Your investment costs.
- The tax liabilities on your interest, dividends, and capital gains.
Notice there is nothing here on forecasting annual GDP growth, outguessing the stock market or determining when the world's various geopolitical problems will be resolved.
Those things aren't important to you as an investor. What is important is saving as much as you can, letting it compound as long as you can, asset allocating properly, choosing your investment selections wisely, and minimizing your investment costs and taxes.
I'll be talking more about these - as well as The Oxford Club Investment System that prioritizes them - tomorrow.