Is Your Investment Strategy Personalised?

Knowledge of investments isn’t everything

The availability of investment news and information has been increasing over time. This has led to an improvement in most people’s understanding of general investment concepts. It has created the opportunity for many to choose to manage their own financial affairs.

Knowing “where” to invest your money is an important part of the financial management equation. However, by itself, it’s far from comprehensive in terms of an investment strategy.

Consider the Storm Financial model of advice.

They used an eminently sensible and highly diversified investment approach for managing the underlying investments for their clients. Their investment strategy at this level was not the cause of the problems their clients would eventually experience. Simply knowing “where” to invest their clients’ funds was not enough to save their clients from financial disaster.

They failed to adequately address:

The size of the investment exposure relative to their client’s lifetime capital accumulation amount (i.e. the question of “how much” to invest), and
How to manage the entry risk for their clients (i.e. the question of “when” to invest).

This part of their investment strategy was not only grossly naïve, it failed to adequately address the personal circumstances of each investor.

The strategic decisions they applied seemed to be based on:

“how much?” = as much you can borrow, and
“when?” = as soon as possible.

Apparently, this strategy was applied regardless of whether the client was a young accumulator or an elderly retiree.

How personalised is your investment strategy?

Many investors confuse personalisation of an investment strategy with choices at the specific investment level (e.g. I prefer BHP over Rio Tinto, or Australian Shares over International Shares). While this is a form of personalisation, it generally doesn’t add any long term (risk adjusted) value. In fact, personalisation at this level generally has a long term cost.

It may help to retain a client though, or convince a DIY investor to continue with their approach over other (more generic) alternatives.

True personalisation of an investment strategy is at the broader level of managing investment risk exposure over time. Arguably, this will have a much greater impact on your long term wealth than a strategy that focuses purely on your specific investments.

The “default” investment strategy

The natural investment strategy for most households is driven by the availability and timing of surplus cash.

Generally, households tend to generate more savings in the latter years of their working lives than the earlier years. It is not uncommon for households to invest over ¾ of their lifetime capital accumulation within 10 years of retirement. In the years prior to this, surpluses are used to reduce mortgages, fund school fees and buy lifestyle assets such as cars, boats, renovations, etc.

The dilemma for many who unwittingly apply this “default” strategy is that they acquire most of their investment exposure over a relatively short investment horizon. If these acquisitions happened to be at the end of a cyclical bull market, it could have quite catastrophic implications.

On the other hand, if you were lucky enough for your pre-retirement years to coincide with a cyclical bear market, you could end up acquiring a lot more market exposure than you would have under more optimistic conditions. The challenge for these investors is to recognise their good fortune. Many fail to do this and shy away from investing during declining markets.

Your investment strategy shouldn’t rely on luck

An investment strategy that may not differentiate at the specific investment level but sets a clear and personalised strategy for managing your investment exposure over time is much better than one that differentiates at the specific investment level but ignores the bigger picture.

A smart investment strategy considers much more than the investment of your current capital. It takes into account your projected savings capacity, the timing of these savings and your risk parameters to build a strategy that reduces the element of luck and focuses on giving you the best chance of achieving your objectives.