What’s Really Important In Investing


March 23, 2016

The Bull Session
What’s Really Important In Investing

If you went to the nearest mall and asked people there, “What is the most important decision in the investment process?” I would venture to guess that the vast majority would say, “The investment of course!”

In my experience those people would be wrong. Successful investing is about developing a process and sticking with that process. In the hierarchy of investment decision making, what investments you eventually buy is way down the list. A lot of investors buy good investments only to do poorly. It’s not just knowing what to buy; you also have to know when to buy it and when to sell it. Those are three good decisions you have to make on every investment in order to succeed. If you don’t have a solid investment process in place, you can mess things up pretty fast. A process gives you discipline and discipline is what gets you results. It’s not sexy, but it works.

The most important thing you need to do is assess your situation, compare it to where you need to be, and that gives you a good sense of what has to be done. When you know what has to be done then you can develop a portfolio that will get you there.

Secondly, you have to be honest with yourself and determine whether you can handle the portfolio you need. The Jack Nicholson line in the movie “A Few Good Men” comes to mind. “You can’t handle the truth!” You can only do well in a portfolio if you can handle the risk of the portfolio. If you can’t, then you will make mistakes that will torpedo your success. It is critical to get your risk tolerance right before you even think about what investments you want to buy.

Thirdly, you have to decide what types of investments you want to consider. Do you want to be “socially responsible”? Do you want to buy international securities, emerging markets, precious metals, etc.?

Fourthly, you decide what kind of help you want to implement your plan. Do you want to use a commission based broker, an insurance agent, a banker, an adviser or a consultant?

Once you make those decisions it is time to put it all down in an Investment Policy Statement (IPS). The IPS tells you exactly how you are going to make decisions concerning your investments. It states who you are going to use to help you, how you are going to construct your portfolio and how you are going to monitor it.

After you do all of that, you can start looking at what types of investments you want to put in the portfolio. Your IPS is designed to prevent you from buying too much of any one investment because you have set limits. It also helps you from holding positions too long without taking some money off the table because you will have rules about rebalancing.

The coolest part about it is when you hear about the next great investment idea at a party you will already know if can put it in your portfolio because you set your limits before you found out that your brother-in-law’s second cousin’s nephew has a new way to frack oil that is going to revolutionize the energy sector. Just stopping yourself from making that investment is worth the effort you put into your Investment Policy Statement!

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC
Tupelo, MS

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