Back to Basics
by Charles Cheng, CFA
From both an investment point of view and in general, the world is a scary place at the moment. Political risk is high with diplomatic tension between major powers and the potential event risk arising out of US impeachment inquiries and Brexit. Indicators of economic activity are also showing warning signs, with PMI data showing contraction in manufacturing in places including the US, China, Japan and Europe while yield curves are still flat or have been recently inverted around the world. In these situations, we’ve often found that rather than worrying about potential turbulence, focusing on investment basics is the key to making rational decisions.
US ISM Manufacturing Index
At the most basic level, investing is postponing consumption to put capital into return bearing assets. Across many asset classes there are many decades of data (and in some cases over a hundred years of data) to support the notion that holding reasonably diversified investments long enough will compound assets into multiples of the original investment. It is not necessary to “right” about short term events to be successful investors. Keeping this in mind, we define basics here as the simple actions and decisions that should be considered with every investment situation:
Control what you can control
There is no sense in trying to predict the unpredictable, whether it is policy actions by temperamental government figures or sudden breakdowns in complex relationships within the financial system. On the other hand, it is a simple matter to keep needless transaction costs low, minimize investment taxes, and maintain a mix of investment assets that lets you sleep at night.
Always keep your investment goal in mind
Investment goals can be separated into two components- return and time frame. Return is dependent on what level of risk / reward that you are targeting, as well as the opportunity set in the market. Short time frames are for when you need the cash to meet some short-term obligations, such as housing or education payments and therefore cannot afford to take much investment risk. For long time frames, the goal is just to grow assets, so you can afford to ride through any potential up and downs and still be successful, as long as you don’t do anything rash.
Stick to your plan
If you are thinking up of new investment strategies after your portfolio has already taken a large hit or after a major event in the financial markets, emotions may be responsible and could cause you to make a significant mistake. Similarly, if you are reluctant to immediately take pre-planned courses of action when something happens, it will likely ruin your entire investment strategy.
Mr. Cheng is a managing partner at a Hong Kong based independent private investment office. This article reflects his personal views and not his firm’s and should not be viewed as an investment recommendation.