When it comes to investing, almost everyone would agree that it is smart to have an investment strategy. Using a strategy, as opposed to “just winging it” or “going with your gut”, can help prevent you from making decisions based on emotions or snap judgments. That’s important, because emotional decisions can cause people to experience more volatility and take on more risk than they can afford.
That is why I always ask prospective clients, “What’s your investment strategy?” Some people blink and admit they don’t have one. Others just shrug and say, “A little of this, a little of that.”
What’s the difference between these two types of people? Simple. The first group admits they don’t have a strategy. The second group is in denial.
People who try to manage their investments using advice from a hundred different corners—like the media, self-help books, or “hot stock tips” from friends—may think they have a strategy. In reality, they have no strategy at all. It reminds me of the Aesop fable, The Fox and the Cat.
The Fox and the Cat
A Fox was boasting to a Cat of its clever devices for escaping its enemies. “I have a whole bag of tricks,” he said, “which contains a hundred ways of escaping my enemies.”
“I have only one,” said the Cat, “but I can generally manage with that.”
Just at that moment, they heard the cry of a pack of hounds coming toward them. The Cat immediately scampered up a tree and hid herself in the boughs. “This is my plan,” said the Cat to the Fox. “What are you going to do?”
The Fox thought first of one way, then of another. While he was debating, the hounds came nearer and nearer. At last the Fox, in his confusion, was caught up by the hounds and captured by the huntsmen.
The Cat, who had been looking on, said: “Better one safe way than a hundred on which you cannot rely.”
When trouble comes or volatility strikes, too many investors react like the fox. Instead of relying on a safe strategy, planned for in advance, they debate between a hundred possible courses. “Do I buy? Do I hold? Do I sell?” By the time they make a decision, the damage is already done.
Of course, it’s never a bad thing to have options, and we should continually examine the strategies we use. But above all, have a strategy. Don’t rely on bits and pieces of unreliable—and often contradictory—advice. Have your strategy researched, planned for, and determined in advance. It is one of the best ways to protect yourself from volatility, risk … and yes, even hungry hounds.