The 'How' of Investing is Often Overlooked
by Dominique Schuh
The share market's recent run of gains has stalled due to weakness among telcos and miners and heavy falls from Crown Resorts and Lendlease. The benchmark S&P/ASX200 added just 0.02 per cent to 5,890.5 points, after being up to 0.3 per cent higher in the early afternoon.
Rio Tinto dropped 0.8 per cent to $70.92 and BHP Billiton shed 0.5 per cent to $27.17 after posting a three per cent drop in iron ore production in the September quarter. Telstra dropped 1.7 per cent to $3.49. The Australian Dollar was trading at 78.45 US cents at 5pm yesterday, from 78.46 US cents on Tuesday
What this means for you:
Success as an investor starts with the key questions of why, what, where, when and how. Why are you investing? What are your priorities? Where is your destination? When do you hope to get there? But it's the 'how' that's often overlooked.
'How' relates to process. It's not just what you invest in, but the approach you take to investing. This means adopting set guidelines to deal with whatever financial markets, and life generally, might throw at you on the way to where you're going.
The Seven Virtues of Process
Following on from how success as an investor starts with the key questions of why, what, where, when and how in the 'What this means for you section', of this week's Market Update, we are going to look at "process" a little more deeply and what it means in terms of investing. The process is critical when investing for many reasons. Here are seven that we believe are important for any investor:
1. Process means setting pre-agreed rules with your adviser to keep you focused on your goals. Without rules, you may be more likely to act on emotion triggered by the headline of the day or whatever other distraction everyone is talking about.
2. The second advantage of having a process is that it can be tied to broad principles. For instance, agreeing that diversification improves the reliability of outcomes may leave you less prone to chasing the latest hot new share or sector.
3. Having a process keeps you focused on elements within your control – like dividing your wealth between shares, bonds, property, and cash, diversifying within those categories, rebalancing regularly, and watching costs and taxes.
4. Process is repeatable. The focus is on skill and execution, not on luck or providence. Of course, things will always happen that you didn't anticipate. But your reliance on chance is less with a set process than when you are just winging it.
5. A process acts as a yardstick. When news breaks, having a process can give you pause for thought. "This news is interesting and diverting, but is it sufficient to change how you are proceeding?" your adviser may ask. The answer is usually no.
6. A process can be personalised. Each person is unique, with different tastes and preferences and risk appetites. Perhaps you feel more comfortable with a larger cushion of cash that can be replenished at regular intervals. If this process keeps you on track and helps you better live with volatility then it most likely a good process.
7. Finally, a process does not have to be set in stone. Circumstances change. Needs evolve. A single process can never incorporate every eventuality. The key point is that the process can be reviewed and adjusted based on experience and what is happening in each individual's life, not to what is going on externally.
Of course, processes work best when they are integrated. Otherwise, a minor change elsewhere can throw you off track. Think of what happens in a restaurant if attention to the quality of ingredients, menu, and execution in the kitchen is not matched by attention to the quality of service in the dining room. Likewise, an investor who has agreed with her adviser on following strong processes around her individual plan will not be served well if those managing her money are not delivering on what they said they would do. In contrast, integrated processes that share and maintain a single vision tend to reinforce each other. Ultimately, process provides structure for your investment journey. The world will always be complex and uncertain, and there will always be a host of potential distractions. But just having a structure in itself can deliver you a level of reassurance.
With a process, you are less likely to pursue the uncontrollable or un-duplicatable – whether wasting time and money trying to second-guess markets or chasing last year's winners or switching your investment strategy based on whatever is fashionable at any one moment. Instead of trying to ride your luck or intuition, you are methodically and steadily following a repeatable and defensible process that your adviser has designed with your goals, circumstances, and preferences at heart. Ultimately, paying attention to process makes your destination more achievable.