When Things Get Tough, Stick To The Plan.

Back To Blog
Mike Tyson Quote“Everybody has a plan until they get punched in the face.”  -Mike Tyson
At the start of every relationship with our clients, we create a long term plan that will look past short term issues such as we’ve seen this year.  In developing that plan, our first step is to establish portfolio parameters based on each client’s return requirements and appetite for risk.  Most investors easily agree to the plan for their portfolio, identifying the parameters within which their investments will be managed.  Of course, agreeing to your plan is the easy part – the challenge is sticking to it.
As former heavyweight champion Mike Tyson pointed out, it’s easy to keep to your plan when things are going well; it’s when investors get bloodied from market setbacks that sticking to their plan becomes a challenge.
That’s why when markets become choppy, some investors look for bold advice and dramatic shifts in their portfolio, going all to cash or all to stocks.  Unfortunately, the track record of those dramatic shifts is not a happy one:
  • During the tech mania of the late 1990s, many investors abandoned the principles of sound diversification and over-weighted their portfolios with technology stocks.
  • Ten years ago, investors began skewing their portfolios to banks and other beneficiaries of the real estate boom and in some cases extended themselves to buy bigger houses, vacation homes and investment properties.
  • While most investors initially agree to geographic diversification of their equity investments, many find it difficult to stick to that commitment.  After a period of strong performance such as the U.S. sees today, the instinctive response is often to heavy up what’s been doing well and to abandon what’s been underperforming.  Ideally, investors should follow Warren Buffet’s advice when he said, “…be fearful when others are greedy, be greedy when others are fearful”.
  • Recently, deviating from investment plans has taken a new form.  Immediately after 2008, a search for safety led to large flows out of stocks and into bonds or even cash, meaning that some investors missed the recovery since the market bottom, which has since rallied 135%.  Additionally, to the extent that investors were buying stocks, many only had an appetite for stocks that pay high dividends and are viewed as an alternative to the secure income from bonds.

In the words of 20th century American journalist H.L. Mencken, “For every complex problem, there is an answer that is clear, simple and wrong.”  Each of the above examples was seen as a clear and simple answer to the complex problem of where to find the best returns in an uncertain environment.  In the search for that clear answer, many investors abandoned the plans that they’d agreed to in calmer times.

That’s why we see our role as an emotional anchor – keeping our clients’ highs from being too high and their lows from being too low.  For many clients, helping them adhere to their plan, sometimes against their instincts, is how we provide the greatest value.  There are occasions when sticking within the parameters of your plan may feel boring, but history shows that the key to successful investing is having a sensible plan and then sticking to it.
Sign Up for Newsletter

Newsletter subscribers receive a weekly email full of economic commentary and market updates, as well as other useful and fun information. In addition to the newsletter, subscribers also receive special invites to exclusive events we hold throughout the year, such as Ladies Day Events, Educational Lunches and Dinners, and our annual Movie Night.