Investing with principles, but adapting your approach to market conditions
We cannot direct the wind, but we can adjust the sails.
Investing is hard. Making consistent profits is like the hunt for the holy grail. At times, you can feel like things are going swimmingly, but then the markets will lurch and contort into an unnavigable minefield. On your trading journey, it is important to stick to your principles while remaining open to different routes. This is the multi-strategy approach.
Principles vs Strategy
The multi-strategy approach to investing recognises that individual strategies can produce incredible results. However, at every moment in time, the market is in a unique position with unprecedented macro and microeconomic factors governing price movements to which investors should adapt accordingly. Despite being comfortable with a changing approach though, investors should adopt a set of principles which influences the way they invest. This overarching framework of principles can work in tandem with a constantly changing strategy.
So, what are the differences between principles and strategies?
Principles should be the central guidance to which your investment decisions conform. They can be relatively ambiguous and high-level proclamations about the mindset that you want to embrace when building a portfolio. Equally, they can be more specific rules that you want to abide by when implementing various strategies and asset allocations.
Strategies, on the other hand, are the specific techniques that you use to invest in the markets. You could follow well-researched and documented strategies that are entirely rule-based , or you could also more loosely conform to a strategic approach.
Principles
Principles come in many forms. They can come from investment research and studying through to moral and religious beliefs. For example, here are a handful of principles that can be applied when assessing investment decisions:
- Patience is the most important characteristic of successful long-term investment
- Never invest more than you are prepared to lose
- Avoid investing in assets that significantly contradict your moral views (e.g., companies that violate human rights, cause significant environmental damage, harm people etc.)
- Maintain a more passive (rather than active) involvement in the markets where possible
- Stick to what you know (for example: technology stocks)
As you can see, there are no hard-and-fast rules to setting principles. Some are slightly vague and open to interpretation, whereas others represent stricter boundaries you can place on your activities. Before making an investment decision, you should reconsider your investment principles.
Strategies
Despite having a variety of principles in place, your ultimate aim is to make as much money as possible within the risk appetite that you are comfortable adopting. Therefore, it is important to be open to an assortment of strategies that can adapt to changing markets, geopolitics and your personal situation.
For example, the opportunity cost of value investing when markets are booming may not be the best approach when considering your targeted risk-adjusted returns. On the flip side, obstinately clinging to a long-term growth stock focused portfolio is unlikely to reward you with the desired outcomes during a recession.
The list of potential strategies is endless as all of them can be customised and they range from more general to very specific strategies. Here are just a few examples:
- Value Investing
- Growth Investing
- Swing Trading
- Arbitrage Trading
- 130-30 Strategy
- Parabolic SAR
The more awareness you have of the available strategies, the better equipped you will be to tackle the markets.
Finding A Balance
Using a multi-strategy approach requires balance in everything you do. A balance between passive and active management. A balance between risk tolerance and risk aversion. A balance between holding and switching strategies.
Fundamentally, the approach you take needs to work for you. However, sticking to investment principles while remaining open-minded to different strategies will ensure that you have plenty of tools with which to make money, while also operating within a predetermined framework.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipients investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. TBanque makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
