June 3, 2024
How can I invest like a professional?
Or, If I am a professional, how can I improve my investing game right now?
Many of you will know that investing is more art than science: it is really difficult to invest consistently well and there is no clear path. But there's a lot of things that can be done to avoid common errors to step up your game immediately.
Here's a collection of the best advice available to everyone:
#1 - do not try to time the market: invest NOW
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Let's say that you are watching the market, sitting on the sidelines and waiting for the "perfect" time to jump in. Maybe you're hoping for a dip, a chance to buy low and ride the wave back up. It's a tempting thought, right?
We have all been through that. It is reasonable: we all want to buy things - including financial assets - at their best possible price, or value. And in rare instances it works: that is called luck.
The issue here is that such waiting game very often will cost you much more money than you think in terms of missed performance.
Take the example below: you see a volatile US stock market and you make the right decision to wait and buy into the next dip (red line). You get it right, as the dip will come. Then, the dip goes away soon as the market recovers. And you did not buy anything until when it's too late, the dip is fully corrected and the market is even more expensive than before (green line).
More on the waiting game here
#2 - focus on asset allocation, not single stocks
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Many friends have asked me from time to time if it was the right time to buy the Tesla stock, or to invest into NVIDIA at those prices, or if Nestle was useless to hedge the portfolio from risks.
My answer is: forget it!!
In a world where public information is available in the instant, where hundreds of analysts will review every single bit of news on Tesla (for example) and will assess and re-assess their expectations on Tesla earnings, and other armies of experts will review the impact of geopolitics, the price of batteries in China and eventually the implications of a felon US President in charge on the company, there is not much an individual can add to the analysis to take advantage of better information to buy at the right price.
We should leave stock selection into a portfolio to real experts out there. By the way, many times the real experts also need to get lucky as they struggle more and more often to extract relevant information ahead of their competition. And AI is also becoming competition there.
What is more relevant, more powerful in terms of performance impact and also possible, it is to focus on the right asset allocation (AA). Several studies suggest that AA alone could be the reason behind 50 - 90% of a portfolio's performance.
Asset allocation is how investors split up their portfolios among different kinds of assets - typically equities, fixed income, and cash - each one with different risks and return potential, behaving differently over time.
We wrote a guide on the behavior of different asset classes here.
Furthermore: general tips on AA here, and specific tips on optimizing AA here.
#3 - diversify your portfolio to hedge risks
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You know this, right? Diversification is an investment strategy based on the assumption that a portfolio with different asset types will perform better than one with a single asset (or a few).
This requires some interpretation, because it is only partially correct. Making a step back, we need to take a look at the opposite strategy to diversification: concentration.
Concentration is an investment approach where an individual focuses a significant portion of their capital on a limited number of assets or sectors (or just a single one). The strategy relies on the belief that placing all resources into a few carefully selected investments can generate better returns.
Let's be mindful that Jeff Bezos, for example, has become a billionaire concentrating all his efforts on building one business: Amazon. Same for Bill Gates just to mention ultra-famous and probably cheesy examples.
If you want to become rich, it is better to concentrate your time and investment efforts on just one or a few things.
The downside of concentration in investing is that if you buy the wrong stock or bond, you loose everything. Game over.
Even when returns look positive, take a look at the different experience you would have as an investor after investing 10 years ago into Amazon, or into Disney: Disney has only returned broadly 20%, when a much safer portfolio of global stocks and global bonds would have returned you close to 50%.
Diversification is the name of the game to protect your capital while still making decent returns. We wrote a guide on the need for diversification here.
This is a balanced portfolio as suggested by Schwab:
#4 - make it simple
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If you happen to be an investment advisor or private banker, investing (through partner platforms) is what you do and I am sure you already do it well. I am not here to recommend you anything else than what you already proficiently do.
But if you happen to be an institutional investor with a high degree of freedom - think family offices (FO) - or a high-net-worth individual (HNWI) looking for simpler investing ideas, or a home-based trader (TR) and even a retail investor (RI) with little experience, it could be best for you to switch your attention to the simplest (and still most rewarding) techniques and instruments.
For TR and RI: an easy solution to simplify your investing process could be (1) to set up automatic contributions into your investment accounts and (2) to make fixed regular purchases over a long period of time with a strategy known as "dollar cost averaging" (buying shares when prices are down and fewer shares when prices are up).
For everyone (FO, HNWI, TR, RI), it could be awesome to switch out of expensive active investment funds managed by reputable investment companies too often unable to beat their market of reference into cheaper and effective ETFs.
For FO and HNWI, we have developed a multi-asset, multi-strategy investment vehicle able to autonomously do asset allocation while performing twice as fast as its market of reference in the past two years. If you are curious to hear more, take a look here.
Thanks for reading so far and good luck investing!
Reach out with feedback or comments: hello@pantar.ai
