It What happens when you are flooded with choices and information overload. How do you ensure that you reach your goal and attain your milestones over multiple time horizons, without markets volatility giving you sleepless nights?
This is why investing is not a one-off move or decision. Every investment decision needs to be a well thought out process. There needs to be a method and process in the decision.
Method in investing
The most important thing to acknowledge is that you make all the right moves based on the available data and you can still go wrong in the outcome. And if the outcome is not in your favour, it is important to know why it went wrong. Was it because it was an action beyond your control or whether the event happened because of a sudden change in the policy?
This is where having a checklist in investing helps you to ensure that decisions and review done through a proper process and not taken in a knee-jerk manner.
Framework: It must be simple and easy to understand and follow. It should not be long drawn and should enable you to make decisions without the clutter of information overload.
Goals: Tagging you investments to a goal or a milestone is one of the key pillars on which the checklist should be structured. Its important that
you know where you want to go and when you will reach the destination. More so, in the volatile investment journey as the path is not smooth and the volatility can make your emotional quotient weak and can destroy the framework.
Time horizon: The checklist must mention the time horizons for the investments. You must mention the asset classes and the holding period for each type of investment. So, if the investing period is six months to one year, equity is prone to risk of permanent loss of capital. If the horizon is over five years, allocating to debt can result in underperformance. This again needs to be in sync with your goal and not independent of it.
Asset allocation: The importance of asset allocation cannot be undermined in any manner and is the key for optimum return. The asset allocation should be based on your profile, risk appetite, returns required and again in sync with your goals. Your milestone should never disappear from the horizon. Keeping it with you will ensure that you own the goal, which in turn will help you to achieve the milestone.
Investment Policy Statement (IPS)
As the name suggests, it records the reasons for investing and gives directions and instructions for actions to be undertaken at various times of investing in the investment journey. It is the mother document, which serves as the go to place, when in doubt, when in euphoria. Following the IPS is one of the corner stones of success in the wealth creation journey.
When we are confronted with extreme volatility or any other uncontrollable factor, having a checklist will ensure that you can revisit and recheck the investment reasons.
This will ensure that the decisions will be made based only on facts and figures and not out of any biases. Keeping investing simple and elementary, which can be understood, followed and implemented is the approach. But then keeping it simple is the most difficult part.
The writer is founder &
managing partner, BellWether Advisors LLP