Overview – How Often Do You Need to Update Your Investment Strategies?
Although investment principles are timeless, the same cannot be said about best practices and investment strategies.
What seemed like common sense in the past, or what many investors agreed was the best approach to reach certain goals, doesn’t take long to become obsolete.
Remember that the investing world doesn’t operate in a bubble – it’s closely intertwined with the business world and, by extension, society as a whole.
So, as the world around investors constantly shifts, so too do the actions they take to best put their money to work. Therefore, it comes as little surprise that investors will want to change their strategies in the face of such changes.
If an investor is bound to change their strategies, how often will they need to do so, to what extent, and when?
Don’t Forget the Purpose of an Investment Strategy
Before we continue, it’s important to remember what an investment strategy is.
An investment strategy is made up of the specific actions an investor plans to take to achieve a certain goal. This doesn’t mean every goal requires only one strategy – multiple strategies can be deployed to try and achieve a single goal.
How investment strategies, goals, and paradigms relate to one another has been discussed before. A visual representation of that relationship is shown below:
For example, an investor wants to make their portfolio their primary source of income within the next 10 years. To accomplish this, their plan is to ensure that every investment they make in the future has some sort of cash payout, whether it’s dividends from stocks/REITs, interest payments from bonds/GICs, or rental income from real estate.
So, this investor begins to think of the different investment instruments they plan to purchase, how much capital to allocate to each, and the type of criteria they’ll impose, all for the purpose of reaching their goal in 10 years or less.
Investors can make their strategies as simple or complex as they want, but ultimately they all serve the same purpose: to achieve a specific investment goal.
Therefore, the efficacy of an investment strategy is determined by its ability to achieve its intended goal within an investor’s desired time frame.
A complex investment strategy may sound impressive, that is until you find out that hardly any progress has been made toward achieving the desired goal. Conversely, a simple strategy may seem unimpressive at first, but its simplicity doesn’t matter if it’s able to reach the desired goal on time, or better yet, ahead of schedule.
Every goal needs to be accompanied by an appropriate strategy. Unexpected circumstances may force you to change your investment strategies, but in the end, your goals continue to serve as your guiding star. Setting any sort of goal without a plan on how to achieve it is nothing more than wishful thinking.
As long as an investment strategy produces the results an investor wants, then they can rest easy knowing that it’s working as intended.
If Your Current Investment Strategies Work, Why Change Them?
Perhaps you’re familiar with the saying “If it ain’t broke, don’t fix it”. For the most part, this age-old saying is true.
An infamous example of this is when Coca-Cola changed their drink formula back in 1985, dubbing it “New Coke”. The new formula received lots of consumer backlash and is widely considered one of the biggest mistakes in Coca-Cola’s history.
This debacle taught Coca-Cola a valuable lesson: if consumers are happy with the product, and show no immediate or impending signs of dissatisfaction, then don’t change it.
Interestingly, the same can be said about investment strategies.
If your investment strategies currently work as intended, and show no immediate signs of slowing down, then there’s really no need to change them at all. Despite this, some investors may feel the need to make changes in order to “keep up with the times”.
Imagine you previously sought investments that had a high probability of increasing in price, then you’d sell them and pocket the capital gains. Now, you’ve abandoned this approach and have switched over to options trading.
If you were already achieving lots of success with your previous approach, what reason do you have to suddenly try a new, unproven strategy?
Now, this doesn’t mean you’re prohibited from making any changes to your strategies. The point is that there’s no need to spend time and energy if there isn’t a compelling reason to do so in the first place.
Additionally, if you change your strategies too often or too drastically, you may be giving up too soon on what you were previously doing. You can’t expect a seed to grow into a mighty tree if you only give it one year to grow and only care for it once in a while.
Even the best investment strategies may seem like failures if they aren’t active for long enough to produce any meaningful results.
Naturally, this begs the question of what classifies as “long enough” for an investment strategy to be deployed until deciding to make changes or continue using it.
Unfortunately, there’s no clear answer to this – it all boils down to an investor’s judgment and intuition to decide when “long enough” has been reached.
For some investors, one year may be too short, while for others it may be too long. It all depends on the specific strategy and what exactly an investor’s goals are.
So, if you’re thinking about changing your current set of investment strategies, it would be wise to really take the time to understand how effective they currently are, see if any incremental improvements can be made (no major changes/overhauls, more on this later), and check how long the strategy has been active.
What to Do When Faced With the Prospect of Making Changes
If, after assessing your strategies and determining that changes do in fact need to be made, there are some important considerations to keep in mind.
First, it’s important not to discard an original strategy completely and implement an entirely new one, something we briefly touched on earlier. That’s because although the original strategy may no longer work as effectively as before, only a few elements may need to be changed to turn things around.
Not only does this save time, but it spares an investor from the risk of trying a new, unproven strategy that may not work as intended. Drastically changing your approach doesn’t guarantee things will immediately get better. Perhaps only a few adjustments are needed to produce the results an investor is looking for.
If further changes are required, it would be wise to make them incrementally, constantly checking if one of those changes will finally put an investor back on track. Not only are small, incremental changes easier to implement and keep track of, but this also reduces the possibility of an investor wasting their time on changes that won’t work.
So, it’s entirely possible for an investment strategy to be completely different by the time an investor is done making changes, but this will most likely be a slow, gradual process, not something that’s done in one fell swoop.
Making drastic changes may seem like the sensible route to take when things are going awry, but taking such extreme measures too quickly may be just as damaging as doing nothing at all.
Don’t Be Afraid to Make Changes, but Understand That Drastic Changes Aren’t Always Necessary
Needing to pivot is a possibility some investors may find uncomfortable, but at times may prove to be necessary to get them back on track. On that same note, some investors are quick to jump the gun at the first sign of trouble, without first stopping to ask if they need to do so at all.
As we’ve discussed throughout this article, making any changes to your investment strategies requires a delicate balance of doing enough to produce the results you want, but not doing so much that you inadvertently find yourself doing something you’ve never done before and further take you off course.
Every investor’s circumstances are unique to them, so knowing how much (or how little) to modify their strategies is something that must be done on a case-by-case basis. That being said, the key takeaway to remember is that investors don’t necessarily need to operate at the extremes in order to move themselves closer to their desired goals.
Wrapping Up
Although an investor’s goals may be more or less set in stone, that isn’t always the case when it comes to how they plan to achieve them. Investment strategies can and do change.
Now, just because strategies are malleable doesn’t mean investors must constantly change what they’re doing. Although the world around them changes all the time, if an investor’s strategies continue to produce the results they want and show no signs of slowing down, then there really isn’t any need to take action.
However, if an investor ascertains that changes do in fact need to be made, then it would be wise to make them slowly, doing so incrementally. Drastically changing what they’re doing doesn’t guarantee results.
Remember, an investment strategy’s efficacy is measured by its ability to help an investor reach their goals in a timely manner. Regardless of how much or how little effort is exerted, what ultimately matters is that an investor can eventually put themselves back on the right track.
