‘7-point plan for staying patient’: Trust your strategic plan but keep some powder dry!

Now we have agreed to stick to the plan, we also need to keep some powder dry.

While today we are unlikely to be jumpy about the chances of being confronted by hordes of pikemen, canon balls and musketeers screaming toward us, the principle for investors facing times of volatility remains generally the same. Keep your head, stay disciplined, address the bigger risks, and get ready to act when needed.

Volatility is both a blessing and a curse for investors. While very few enjoy a stomach-churning wild ride in their returns, it is a fact of life that volatility also allows investors to capture significant long term opportunities (or dare I say, ‘bargains’).

Of course, none of us would be so silly as to buy high and sell low, right? Especially because we know about a thing called the ‘cycle of investor emotions’. Remember the story? Sell when markets are in a euphoric bull phase and valuations are extremely expensive, and buy when there’s ‘blood in the streets’ and valuations are cheap.

But if we are going to be honest, the actual evidence of investor behaviour here and overseas, clearly shows most investors do quite the opposite. Buy high and sell low!

The key problem with volatility is it pokes the emotional response mechanisms in our nature. Fight or flight etc. Often this takes the form of “don’t just stand there, DO something!” The problem is, when markets have wild gyrations in very large ranges, without a clear overall trend direction, it is very easy for investors to give in to their emotions, take big bets, and end up whip-sawed (a term used to mean getting ‘run over’ by a market reversal in a short period of time, before getting ‘backed over’ again as they exit just before the market finally moves their way!).

In markets like we have at present, traditional asset classes look expensive, cash yields are low and getting lower, and the more investors look around to generate returns the more they can be excused for feeling like one of Cromwell’s Roundhead troops – under siege!

So let’s take some sage advice from Mr Cromwell (note: on this point anyway … after all, he did ultimately end up executed for high treason):

  • Keep your head & stay disciplined – if your strategic investment plan has been well constructed, appropriately diversified, and built to survive over the ups and down of a full cycle, then TRUST it. If your strategy isn’t like this, then FIX it. Don’t give in to emotional triggers for investment decisions, especially in times like the present.
  • Address the ‘bigger’ risks – ensure your strategic portfolio has a mix of real diversification, don’t pay too much for assets, and allow enough flexibility to make adjustments so you can capture emerging opportunities and address emerging risks.
  • Get ready to take action – yes, many traditional asset classes appear expensive at present, but this does NOT mean EVERYTHING is expensive! Even in traditional asset classes like shares and fixed income, there are significant pockets where valuations are more reasonable, if not cheap. This is where it pays to keep a little powder dry, so you can put some money to work to capture long term opportunities if good assets get caught up in a broader sentiment-driven sell-off.

The bottom line – trust in your strategic investment plan. If it’s seen you through challenges before, it will likely do so again. To avoid getting whip-sawed, stay reasonably close to your strategic asset allocation – volatility increases uncertainty, and when most things are expensive and sentiment driven, don’t stick your neck out too far. Finally, stay flexible enough to capture value opportunities when presented by market over-reactions.

This combination of strategic discipline and ‘measured’ opportunism is what is needed to keep you on track for meeting your long term goals. Especially when markets are volatile, the outlook a little cloudy, and irrational impulses can be strong.

This article forms part of the 7-point plan for staying patient series.

* https://en.wikipedia.org/wiki/Trust_in_God_and_keep_your_powder_dry