Always Keep In Mind Why You Invest

Narrowly defined, investing is a process by which individuals and institutions endeavor to make gains on the money they have saved. The basic purpose of investing is to make money with money, while taking as little risk as possible.

 There are many reasons, beyond the basics, for holding an investment portfolio. Reasons may include: providing cash flow to support spending needs; preserving assets for future generations; hedging risks associated with other transactions; managing tax burdens or building a safety net to protect against unforeseen events.

Keep In Mind Why You Are Investing

Once you’ve determined the broader reason for your portfolio, you need to determine if it is performing in a manner that fulfills the intended investment purpose. Based on your investment goals, you need to ask questions that will determine suitability. Is money available when needed? Does the portfolio provide the income and growth necessary to support spending needs? Is the portfolio’s tax strategy effective? For investors and financial advisors alike, understanding the true purpose of an investment program is paramount and will have broad and meaningful implications with respect to investment decisions.

Selecting A Relevant Benchmark

Selecting a relevant benchmark to measure portfolio performance is crucial. A benchmark must be established at the time a portfolio is created and should only be changed when the investment strategy changes. Many investors judge their portfolio relative to a broad market benchmark with assessing performance. “The market was up 10 points today, but my portfolio is down.” Comparing broad market indexes, such as the S&P 500 or the Dow Jones Industrial Average, which are simple measures, can sometimes be misleading. Investors should not be concerned with the performance of others or the broader market, but only focus on their own results relative to an appropriate benchmark and the ability of their portfolio to accomplish established goals.

Don’t Ignore Compounding Returns

Investors focused on the short-term, attempting to persistently beat a falsely identified benchmark, lose sight of the significant benefits of compounding returns. The effects of compounding even modest rates of return are compelling. At a 6% rate of return an investor would nearly double their money over 10 years and more than triple it over 20 years. Conversely, a more aggressive investor earning 10% a year for nine years only to experience a 20% loss in year 10 would ultimately be in the same position as the more conservative investor, probably not as well rested though. The investor earning 6% a year may have never beat the index, but their portfolio is fulfilling its purpose.

Time – Your Most Valuable Asset

Warren Buffet uses a baseball analogy to describe the benefit of time for any investor. He believes that investors should exploit time, while exercising discipline and patience throughout the investment process. Buffet recommends that investors should imagine themselves as a batter in a baseball game, in which the umpire is not calling either balls or strikes. Not having to worry about the count, allows the “batter- investor” to watch hundreds of pitches go by. The patient investor waits until they see the perfect pitch for them, one that satisfies a need, is priced right and above all is understandable.

Time and patience are incredible assets for investors that are often forgotten. The combination of investing with a clear purpose, focusing on the value of time in, rather than timing, the market and exercising discipline and patience allows investors to ride out the rough patches in the market with the confidence that their portfolio is achieving its objectives.