Reaching Your Goals by Driving Safely and Efficiently
When talking about investment strategy, I could just as easily be talking about the strategy I employ while driving down the highway to arrive at the airport for my flight. In Southern California, that might involve driving Northbound on I-405 from Orange County to Los Angeles Airport (LAX).
I can’t control the environment (weather, highway traffic density, accidents) but I can control what time I leave the house. The more time I allot for the journey, the better chance I have of making my flight. If I don’t allow enough time, I’ll find myself taking more risks to make the flight, such as speeding tickets or accidents. Using this same analogy for my investments, the more time I allot for my investments to grow, the better chance I have of reaching my goals, safely and stress-free. By allowing sufficient time, I can avoid taking on more risk hoping for higher investment returns.
Another element in my control on the drive to LAX is dynamic decision-making on choosing which of the 4 highway lanes to drive in. If I stay in the right-hand lane (aka The Slow Lane) for the whole journey, it will likely take me the longest time. I may think it’s also the safest lane because I’m travelling the slowest, but in reality there are ever-present risks of merging traffic, slow-reacting trucks, and poor drivers. The investment “Slow Lane” would be CDs and Bonds, which although slow and steady, they face inflation risk. The second lane is not much better because cars and trucks will constantly move in and out as they pass traffic from the right lane. My strategy is to drive in the third lane, resisting the urge to repeatedly switch lanes as others look more attractive, and only moving out the lane when confronted with an unexpected accident. Constantly switching lanes is the riskiest strategy, causing accidents, creating stress, and likely not getting me to my destination any faster.
With my investments, I also stick to the third lane: not the slowest, maybe not the fastest, but the safest and surest. I select a diversified portfolio and stick to my allocations, resisting the urge to switch caused by panic or greed, and only make changes when encountering unexpected roadblocks. What we’ve done in this little exercise is address the key elements of an Investment Policy Statement. Whether you have an investment advisor or not, you should be following these three steps:
Determine how much time you have before needing certain amounts of money
Decide which investment allocation lane you want to be in
Decide what events will cause you to leave your lane
If you are taking the journey with GW Financial, know that you have a CFP in the seat next to you that gets you into the carpool lane, which gives you the best chance to succeed!