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10 Simplified Investment Management Principles

Joe O'Boyle

To help navigate the investment landscape and financial markets, we share 10 simple investment management principles with our clients. While past performance is, of course, no guarantee of future results, the following principles have historically correlated with a greater chance of investment success.

Diversify. Build a well balanced, low cost, globally diversified portfolio based on your risk tolerance, time horizon and investment objectives. Diversification means allocating capital in a manner that reduces exposure to any one asset class (stocks, bonds, cash, etc.) or particular risk. By investing across a variety of asset classes with, ideally, a low correlation of returns, you may have a portion of your portfolio that performs well in a good economy while another portion of your portfolio may perform well in a down economy. In doing so, you may offset the potential impact of a poor-performing asset class on your overall portfolio. Diversification will not ensure gains or guarantee against losses, but can better help to manage risk.

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Stay the course. Maintain a written investment policy statement and consistent savings discipline to invest regularly during good markets and bad. Easy to say, more difficult to execute; investors love to chase returns of higher risk investments during good markets and scurry to conservative investments during down markets. Unfortunately, this often means buying high and selling low. Having a written investment discipline helps to stay the course and stick with your plan to better achieve your goals.

Invest for the long term. Time and compound returns are a powerful combination for potentially growing your wealth. Albert Einstein, who studied the mysteries of time and space, called compound interest the most powerful force in the universe. For example, a portfolio that earns a 6 percent annual rate of return will double in value roughly every 12 years and quadruple in value roughly every 24 years.

Focus on what is in your control. Amidst volatile markets, focus on what you can control by sticking to your investment plan created during calmer times. Run a Monte Carlo analysis, which simulates up and down markets of various lengths, intensities and combinations to create a realistic assessment and probability framework for achieving your goal(s).

Rebalance regularly. Regular rebalancing institutionalizes buying low and selling high by reallocating your portfolio to its original investment mix. Rebalancing may also serve as a risk management mechanism. Give your portfolio regular checkups to ensure that your target investment mix aligns with your risk profile.

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Maintain liquidity. Maintaining sufficient liquid reserves may help you stay calm on the emotional roller coaster of financial markets. By setting aside emergency savings that will cover your short-term expenses, you can keep a cool head and better manage your stress during bouts of market volatility. Knowing that you have your short-term needs covered may help some investors sleep better at night.

Accept normal market volatility. Accept that market declines and fluctuations are a normal and expected part of investing and, historically, the trade off for potential long-term growth. Short-term market volatility is the friend of the long-term investor as it creates lower asset prices for purchase. To paraphrase Dean Witter, It takes courage to be optimistic about the future when pessimism abounds, but when the future is again clear, today's bargains will have vanished.

Invest incrementally. Often referred to as dollar cost averaging, invest incrementally over full market cycles rather than attempting to repeatedly time a market bottom. It is better to be generally right by investing consistently over time, rather than precisely wrong by investing all at once.

Noise is not a plan. It is imprudent to let the noise and hype of short-term events, covered aggressively in media headlines, influence long-term investment decisions. Plunge. Soar. Optimism. Panic. Greed. Trigger words and sensational headlines may cause investors to make irrational decisions, but market timing is folly.

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Monitor your behavior. Investor behavior and corresponding adjustments to your asset allocation (strategy to balance risk versus reward) drive potential investment returns and impact your ability to achieve your goals. As Warren Buffett says, "The most important quality for an investor is temperament, not intellect."



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