For a brief period when I first began trading, I went down the rabbit hole of thinking there was some magical strategy – some holy grail ─ that would just print money nonstop. I thought I could find some method, I could continue to rinse and repeat, and not have to deal with stretches of underperformance or other mental headaches. After a few winning trades, people can begin to think investing is easy. Unfortunately, it's anything but easy.
While I've discovered and developed some effective methods along the way ─ thankfully ─ I quickly learned there's no perfect system. There will always be some negative aspect to all approaches. It's simply a balancing act of weighing the positive against the negative, the risk against the reward. However, there are some strategies which I believe can come very close to perfect. Especially on shorter trading time frames. On longer time frames I've yet to find any approach that meets my strict definition of perfection. And I highly doubt one exists.
When it comes to trading and investing, most investors are continuously searching for the next hot stock, impressive mutual fund or any popular investment vehicle in general. Human emotions make us attracted to the latest and greatest. Too often the method used to choose such a holding is based solely on past performance. I personally believe this is a dangerous approach.
Just because a stock or fund had impressive returns is not the sole reason you should add that holding to your portfolio. Could you withstand the drawdowns that were associated with that holding? Are you okay with the fees? Does it truly meet your risk tolerance? Does it fit your goals and meet your timeframe objectives? Can you understand what the strategy is? Or are the fund managers secretive, not transparent, and act as if they've discovered the holy grail? (Such an approach is a huge red flag to me.) There are numerous questions which need to be considered. I'm all for great performance ─ who doesn't want to make money? However, you must weigh all the information to see if it's a fit for you.
Those in search of the holy grail would be wise to remember that not everything is as great and perfect as it may seem. Strategies that look good aren't necessarily good. And strategies that seem boring and too simple are sometimes the best. In my opinion, the holy grail of investing is designing a plan and strategy you can stick with and not alter even in the toughest of times.
Let me pause here for a minute and clarify what I mean by strategy. Many people, when they hear these words, will immediately associate them with market timing and active management. However, buy and hold is a strategy. Trend following is a strategy. Dollar-cost averaging is a strategy. Hopefully I've made it clear that a strategy can simply be your plan going forward, which can be active or passive. Whichever method or combination of methods you can categorically stick with, without any hesitation, is the holy grail, in my opinion.
What is not the holy grail is jumping from best-performing strategies year by year in hopes of obtaining past performance results. You may get lucky. And it may work. But that's all it would be: luck. All investments will go through good and bad times. And you may need to ride out some the bad times in order to capture the good. Often our first years may be part of the bad. It's unfortunate, but nothing is ever as smooth as a backtest or other historical data may show. So, it's important to think about worst-case scenarios instead of only focusing on the best possible outcomes.
While I advocate for plans with clear-cut rules attached, I realize there are many methods that can work. Yet the only way any plan can work is if we stick with it and see it through to the end. Over the years I've noticed major fallacies regarding risk, performance and future expectations. The investment process can be quite rocky at times, but the results can also be quite rewarding.
By sharing these blogs with you (the client), my goal is to help you realize that you (the client) play the most important role in your financial future. Investment advisors, financial advisors, financial planners ─ or any other title you want to insert here ─ are all capable of picking and designing a good plan moving forward. The challenge is building a plan which you (the client) can stick with in a disciplined fashion in both the good and the bad times. I challenge you to weigh all the information, don't let short-term emotions ruin your long-term goals and always attempt to be disciplined in your investing and trading. If you would like to find out more about what I consider the holy grail, let's discuss it further, click here.