“Everyone has a plan until they get punched in the mouth.”
This is a well-known quote by Mike Tyson, who at the time was speaking with reporters that had asked him about Evander Holyfield’s boxing style and strategy prior to a fight. When speaking in 2012 with a reporter about the quote, Tyson explained, “If you’re good and your plan is working, somewhere during the duration of that, the outcome of that event you’re involved in, you’re going to get the wrath, the bad end of the stick. Let’s see how you deal with it. Normally people don’t deal with it well.” Later in the interview he posed it as a question, “How much can you endure buddy?” This explanation may have more in common with investing than the more popular, original quote.
It is always important to have an investment strategy, especially in times of market volatility. Investors must have a plan that should be followed in both rising and declining markets and that plan should be tested. More conservative investors will use asset allocation, but this will only work as well as the allocation itself. Occasionally, allocations and strategies will include investments that may have a bleak forecast, such as bonds in a rising interest rate environment. The key for successful investors is to follow the chosen strategy during all markets. The plan should help keep investors’ emotions in check. A well thought out plan or strategy will help most investors focus on the long-term.
The longer a strategy has been deployed, the more confidence an investor or advisor can have with the plan which will make it easier to stick to. This sounds logical but investors, and even many advisors abandon their strategies during times of increased volatility and allow their emotions to control decision making, diverging from their strategy. Whenever money is involved, it is always difficult for people to separate their emotions from logical decision making.
This is true in both bull and bear markets. Bull markets traditionally see even conservative investors stray from their plan by increasing risk as they strive to continue achieving higher returns or as the fear of missing out sets in. The opposite occurs in bear markets where many people become more risk averse attempting to preserve capital. We continue to believe, as we have stated many times, that consistently timing the stock market is close to impossible. However, many people try to and forget that a person would have to be correct twice when making these market calls. One must correctly predict the right time to sell and then predict again the correct time to buy back in. Thus, anyone who wants to be a successful investor must have and follow an investment strategy.
Our investment strategy has been tested throughout both bull and bear markets, which may be the reason we have so many long-term relationships. Yet having a strategy does not mean that one cannot keep an open mind to different investment options and explore new investments. We are constantly evaluating ever-changing market conditions and new investment offerings while maintaining our value orientation: watching costs, returns, potential risks, and investment reliability are some of the main factors we consider. I believe we are open-minded but “Doubting Thomas” investors until our evaluation is complete.
Our evaluation eliminates many investments often based on costs, commissions, organizations promoting the products, tax disadvantaged investments, the time the idea has been tested, and the ability for the average investor to understand the investment along with many other criteria.
We are and have been unenthusiastic about investments made through insurance companies, commission salesmen, financial professionals not held to the fiduciary standard, companies offering incentives to sell their products, load mutual funds, annuities, and whole life insurance products to name a few.
What is our plan?
Structured investments that are linked to the performance of well-known indices can provide suitable risk versus reward profile and is suitable for conservative to aggressive investors. We invest through a competitive bidding process and sometimes purchase these investments in the secondary market. We use a ladder approach with multiple maturities to help increase the chance of benefitting from any downside protection while decreasing some of the negatives while improving liquidity.
Closed-end funds (CEFs) purchased at a discount to net asset value can provide investors with several advantageous opportunities. These include a higher distribution yield, possibility that the discount to NAV may narrow, efficient management and shareholder activism to name a few. CEFs trading on exchanges allows us to track them throughout the day while offering liquidity and flexibility.
Exchange-traded funds (ETFs) can offer diversification at a low cost and the ability to access to many asset classes and markets. ETFs paired with option strategies, such as covered-call writing, enhance the possibility of better risk-reward returns in constantly changing markets.
The plan or strategy must be flexible depending on market environments, client risk profile, portfolio size, investment pricing, cash flow needs, taxes and many other client requirements. Most clients have a custom-built account with some or all of these investments depending on their needs, account type, size, tax situation, along with a variety of other factors. Simply put, the plan must fit the investor and the investor must fit the plan.