Overview – Taking Investment Matters Into Your Own Hands
When dealing with problems in your life, what approach do you usually take? Are you the type of person who deals with them as they appear, or do you take certain steps ahead of time to make sure you avoid running into certain problems altogether (or at least make them a lot easier to deal with)?
Knowing how to solve problems is an important skill everyone should possess, and sometimes we need to deal with them in less-than-ideal circumstances. But, you probably don’t want to spend lots of time addressing all sorts of problems, both large and small, if you don’t need to.
Similarly, good investors know how to fix problems quickly and without much fanfare, but truly exceptional investors know how to anticipate future problems, needs, and changes before they materialize and reach a critical stage.
So what’s the secret of the exceptional investor who knows how to anticipate problems down the road? Being proactive.
Being a proactive investor seems like such an obvious thing to do, yet so many investors underestimate just how powerful this “obvious” trait is. Being proactive definitely requires a fair bit of work, but the effort you spend will pale in comparison to the rewards you’ll reap, both now and in the future.
What Does It Mean to Be a Proactive Investor Anyways?
When you hear that someone is “proactive”, what thoughts come to mind?
Chances are, you probably visualize someone who is well prepared, diligently performs all their duties and responsibilities on time, and anticipates any future problems and issues long before they materialize. Indeed, that’s what a proactive person does.
So if we apply this same thought process to investing, then a proactive investor is someone who understands that certain responsibilities, problems, and other issues will eventually pop up, so they take action today to make sure these things are addressed well ahead of time, or at least are a bit easier to deal with when they eventually face them.
Now, there are some problems in investing that can’t fully be anticipated and there will be times when an investor’s only option is to deal with them as they appear, but a proactive investor is someone who does the most they possibly can with their knowledge, experience, and resources to keep their dependency on external factors to a minimum.
No investor can control how the market behaves on a given day, which can sometimes lead to some very steep and persistent downturns. However, they have full control over how their portfolio is constructed, how to manage risk, and most important of all, have full control over the decisions they make.
Being a proactive investor is all about taking action ahead of time, and by doing so setting yourself up for success, or at least greatly improving the probability of success.
For example, you know that it’s only a matter of time before you need to go over the annual reports of all your holdings – after all, this is something you perform on a yearly basis.
Since you know this is a task that you’ll eventually need to perform, you can make preparations ahead of time to make sure you have the chance to do this properly. Perhaps you pick a week in the coming month, where, every evening you’ll read the reports. Because you’ve decided when you want to do this task, you take the required action needed to make sure every evening that week is free.
This leads us to our next point: Although proactive people do their best to anticipate future needs or problems, this doesn’t mean they know for certain what will happen in the future.
Anticipated events can end up being completely different from what was originally envisioned, but that isn’t a valid excuse not to make preparations as best you can.
Want to Stay On Top of Your Investment Responsibilities? Learn to Be More Proactive
Being an investor means shouldering a wide variety of responsibilities such as ensuring your tax documents are properly sorted and filed on time, voting ahead of time before shareholder meetings, and responding to any correspondence you receive in a timely manner.
Indeed, being an investor comes with its fair share of responsibilities, and these will only increase as an investor’s portfolio continues to grow in size and potential complexity.
Regardless of an investor’s experience, level of knowledge, or age, the assumption being made about them is that they will handle their affairs to the best of their ability. Negligence or failure to remember isn’t a valid excuse when you fail to file your taxes on time/file them incorrectly, fail to vote in time for a shareholder meeting, or fail to respond to important letters from your broker.
In the investing world everyone is assumed to be a responsible adult regardless of age, so it’s extremely rare for deadlines to be revised and is practically unheard of for a deadline to be pushed back for the sake of one person. Unless you happen to be extremely important, the investing world has no time to wait for one person.
So how can an investor prevent these things from happening to them? By learning to be more proactive, of course.
A proactive investor doesn’t have to worry nearly as much about missing deadlines or failing to respond to important correspondence because they’ve likely gone the extra mile to ensure that doesn’t happen in the first place.
Being proactive doesn’t mean you need to put in herculean amounts of effort all the time. Small, simple acts can still be highly beneficial if it means they’ll help reduce your workload in the future. Even something as simple as clearing your schedule for a given weekend or setting a reminder to vote one week ahead of a shareholder meeting can make all the difference.
Now, just because you’re proactive doesn’t mean you’ll never miss a deadline or fail to respond to important correspondence ever again, but it greatly decreases the chances of these things from happening in the first place.
Investment Risk Management: A Classic Example of Proactiviteness at Work
Although learning to be a proactive investor sounds great and all, is there any other way proactivity can be applied to investing other than dealing with your responsibilities, and if so, does it work?
Definitely, and it’s something many investors are already doing: investment risk management.
As we’ve brought up before, investment risk isn’t static: just because the investments you hold are classified as “low risk” today doesn’t mean they’ll stay that way forever.
So, how can an investor prevent risk from spiralling out of control? By performing certain tasks today to avoid that from happening in the first place, such as: adequately diversifying their portfolio, divesting from increasingly hard-to-understand industries, or reducing the size of certain holdings. These are all things investors can do little by little without having to spend exorbitant amounts of time on them.
Effective risk management processes are inherently proactive because they do their best to keep risk as low as possible by taking the necessary steps today to keep it that way in the future.
By the time a small risk becomes a major problem, it’s already too late to implement any risk management strategies – your only remaining option is to put out the fires as best you can while trying to keep damage to a minimum. You can’t manage risk after it has already materialized.
Remember, being proactive doesn’t mean you’ll never run into problems ever again, but it can certainly help reduce the number you’ll encounter or at least make the problems you do need to deal with more bearable. Similarly, risk management is far from perfect, but despite that, it can still keep risk low enough and under control to a degree that most investors are fine with.
What Happens if You Don’t Choose to Be a Proactive Investor?
What if, despite all the benefits of taking investment matters into your own hands and not waiting around for solutions to magically appear, you still choose not to take the time to become a more proactive investor?
In the (very) short term, things might actually be quite enjoyable. Because you aren’t constantly thinking about what to do next, what affairs need to be dealt with ahead of time, and what problems you need to anticipate, your mind is mostly clear and your life is generally stress-free.
However, this period of comfort will be extremely short-lived.
Eventually, you’ll find that because you chose not to be proactive, your investing life will constantly be consumed with trying to put out countless fires as they appear while struggling to stay on top of even the most basic tasks.
You may soon find yourself failing to meet important deadlines, missing important messages you needed to respond to, or being unable to perform routine tasks such as an annual portfolio review. The worst part is that all these problems can add up to the point that they become almost impossible to deal with (see email bankruptcy as a real-world example of this).
In investing, nobody is going to come and save you if things fall apart. If you make a bad decision because you failed to secure adequate information ahead of time or you get an unexpected tax audit because you didn’t check to see if your tax documents were in order before filing, don’t expect someone to swoop in and magically fix everything.
If you choose not to take steps toward becoming a more proactive investor, then don’t be surprised when the consequences eventually catch up to you one day.
Wrapping Up
Investors have all sorts of responsibilities and problems to deal with, but this doesn’t mean every investor takes the same approach when it comes to dealing with them.
One approach is to be proactive, that is, anticipating future needs, problems, and changes ahead of time by taking action today. By doing so, an investor can address certain problems, responsibilities, and other matters long before they arrive, or at least make them a bit more bearable upon their arrival.
Now, being proactive doesn’t mean the rest of your investment career will be smooth sailing – there are some problems and circumstances that appear unexpectedly and can only be addressed as they show up.
However, the point behind being proactive isn’t to solve every problem you’ll ever face, rather, it’s to address problems you know will one day appear. Nobody knows when the next market crash will be, but everyone knows when tax season is, when quarterly/annual reports are released, and that a review of your portfolio will eventually need to be done within the year.
Of course, an investor can choose not to be proactive and simply deal with things as they show up, but it’s only a matter of time before they’ll greatly regret this decision.
