Investment strategy: “Luck is the residue of design”

Branch Rickey was a cigar-chomping Methodist who changed the face of baseball forever. He invented the farm system. He broke the colour barrier by bringing Jackie Robinson to the Dodgers. And he followed his mother’s wishes by never going near a ballpark on Sunday. He would have had no truck with the dart-throwing school of stock picking. Or with the so-called random walk theory.

You frequently see stories in newspapers about reporters who tossed darts at the stock quotes on the financial pages and pitted their “choices” against those professionals offering strategic investment advice. They often get lucky. (As reporters, of course, their financial futures are not riding on the picks.)

The random walk theory supposes that past performance of stocks is no indication of future performance and that all the information you need is in the current share price. It says, in effect, that what you do know won’t help you.

With Branch Rickey we say: don’t bet on it. (As a good Methodist, Rickey never bet on anything.)

Or, to look at it another way, it’s hard to think of a single area of life where being disorganized beats being organized.

You don’t need a theory, or a set of darts. You need a long term strategic investment plan.

A well-balanced portfolio is not a timid portfolio

When you set out to create your personal strategic investment plan, think balance before you think of any other detail.

Always keep in mind that you’re looking for long-term success based on a steady diet of profits. (If not, we recommend that set of darts as your most useful investment tool.)

To generate those ongoing profits, you need ballast to keep the ship upright. You should keep a certain amount in cash, always. You need high quality conservative equities, preferably dividend-payers, to ensure that you’re never swept away by a market correction. Or, indeed, a full-blown crash.

But if you stop there, you’re also limiting yourself to plodding gains, and cutting off the chance for some genuinely eye-popping profits.

A well-balanced portfolio is not a timid portfolio. The whole point of creating a balanced portfolio is to give you the opportunity to gain the maximum amount of money, not the bare minimum.

Setting up a well-rounded portfolio also implies knowledge. Know the companies you’re investing in, know when to buy, know when to take profits, know when having extra cash on hand will enhance your opportunities to scoop up some first-rate bargains.

But let’s not get ahead of ourselves. A good portfolio is not built overnight. First, ask yourself this all-important question: How much time do I have to get what I need?

Investment strategy by age

How many people do you know who seek to keep fit by exercising more (or less) regularly on a stationary bicycle? Probably a lot more than are investing with their life cycle in mind.

It’s important. If you’re 26, and equipped with a good entry-level job, you’re not going to spend too much time thinking about just how much you’ll need to retire on. The first mortgage, the cost of raising children, whether to upgrade the car and other such topics will surely dominate your thinking.

If you’re 52, however, you should have a pretty good idea of how much you’ll need to retire on. Then you have to consider whether or not you think you’ll have enough based on your current pace of savings and investment.

(An aside here: don’t panic. It’s not too late.)

If you’re already retired you should be thinking about enhancing what you already have, safely but surely.

Your age matters, but so does your personality. Someone who drove Ford Fairlanes until they stopped making them and mowed the lawn every night at precisely 5:45 is not likely to sleep securely with a portfolio chock full of penny mining stocks.

Even if you drove a sports car for years and took up whitewater rafting at age 46, you probably shouldn’t have a portfolio full of penny mining stocks, either, but that’s another story.

The point is: know your own tolerance of risk and build accordingly.

And of course your special circumstances are crucial. Do you expect further raises in your working income? Are the kids out on their own? Do you have extra medical bills to pay?

Essentially, you can create different portfolios for each stage of your life. There is one for the years before 40 when you can afford to be more aggressive.

Another is for the time between 40 and 60 when you’re likely to have good earning years ahead.

A third is for the years over 60 when you require more safety in your investments.

Each portfolio can be tailored to your personality and your circumstances. Your situation may demand that you invest cautiously well before you’re 60, for instance.

Or you may just be the kind of person who loves a challenge, and will always have a portfolio bristling with high-risk investments. . . .


This introduction to building your best long term strategic investment plan was excerpted from Chapter 3 ofThe Little Book of Investment Knowledge. To get the rest of Chapter 3 and your own free copy of this book, click on this link:


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