The markets have been increasingly volatile over the last few months. After an extended period of low volatility, this has caught some investors off-guard, with many piling into \’tipped\’ stocks without examining the fundamentals of the company and consequently being surprised when they suffered a sudden drop in value as volatility picked up.
Being a value investor, the majority of my portfolio has weathered the increase in volatility pretty well – I hold most securities for years at a time and as a result am not really concerned with their intra-week and intra-month performance. Even sudden changes in cash flow are less of a concern than they might be to others, with my long-term view being that markets will chop and change, and corresponding cash flow with them.
When it comes to long-term investments, I believe in setting out some simple, easy to follow guidelines and then sticking to them. Investors that overcomplicate their methodology rarely generate outsized returns, so really, why should they waste their time coming up with complicated timing strategies and asset allocations? Below are a few rules of thumb I try to stick to when running my portfolio.
1. Keep costs low. It sounds obvious, but costs are returns generated by your investments that you will never get the benefit of. The lower my cost of trading is, the more of the returns I get to keep for myself. This isn\’t to say that I cut down on detailed research materials or on using a reputable investment broker, more that I won\’t ignore how much I\’m spending on buying, holding and off-loading my investments.
2. Trade for the long-term. I work pretty hard for the money I have so I\’m naturally quite protective of the capital generated by my job. Throwing this away on \’bets\’ is about as sensible as drinking it away down the pub. Instead, I will be patient and considered in my investing strategy, neither seeking a \’quick buck\’ nor failing to do my own due diligence into an opportunity.
3. Don\’t be greedy. We\’ve all read the stories about the multi-millionaire bankers and portfolio managers. We\’ve all seen the tantalising adverts in the paper promising investment returns in the double figures. What we don\’t see are all the hundreds of people that pour their capital into opportunities that they don\’t understand, that aren\’t a sure thing, that lose them their money because they get greedy. My main aim is to generate a return of 5% capital growth a year, plus a further 4% in dividend income. If it\’s slightly lower than this, I won\’t lose sleep over it, if it\’s slightly more, then I\’ve had a good year! But I won\’t swap out my patient, considered approach for a sudden trend or tip I hear from a man at the office.
4. Diversify! I buy different baskets of assets that perform in different ways, are geographically diverse and generate their income from different sources. I spread my investments between highly concentrated investments in individual opportunities and a broad spread of global investment trusts. These investment trusts act much like a team of advisors searching out the best opportunities in different regions and sectors across the globe. Rather than having to become an expert in the intricacies of the South American mineral markets, or having to understand the nuances of the Russian political scene, I outsource this to someone closer to the situation and who has a more experienced understanding of the issues surrounding an investment.
5. Active management. As a reasonably savvy investor, I\’m not a fan of passive investing. I prefer to have control over my money, and a tracker fund takes that control and gives it to a vehicle that is controlled by millions of squabbling, disagreeing people that likely have no correlation to my requirements or expectations. As such, all my investments are actively managed, either by myself or another team of investment professionals.
6. Generating an income. I want my investments to support my lifestyle. If an investment isn\’t capable of generating a return for me (at least in the long-run), I generally will remove it from the portfolio. My only exception to this are a very small number of capital growth opportunities – currency trading or commodities speculation, which due to my preference for long-term investments, I rarely move into.
Ultimately, I believe that an investor that keeps their costs low and invests carefully over an extended period of time will far outperform an investor that jumps into a myriad of opportunities they don\’t understand, often paying a premium to do so.