Overview – Having Backup Investment Strategies to Fall Back On
Although an investor’s goals serve as their guiding light and are usually unchanging, circumstances change all the time, forcing them to constantly readjust what they’re doing to achieve those goals.
When investors find their strategies veering off-course, many times this can be resolved by making some adjustments along the way. In most cases, this is usually enough to get them back on track.
But what happens if a certain investment strategy you were following is so dramatically off-course that it can’t be corrected no matter how many adjustments you make? If further changes prove to be futile and just a waste of time and energy, it may be best to abandon the original strategy entirely and try a different approach.
Because of this, it doesn’t hurt to have backup investment strategies you can fall back on just in case you find yourself suddenly needing to change direction.
Why Bother Creating Backup Investment Strategies in the First Place?
If strategies change all the time, and if investors usually address this by making minor changes to put themselves back on track, then why bother creating backups in the first place? After all, isn’t the ability to adapt more important than coming up with a multitude of backup plans that may never be needed?
To help answer this question, let’s ask the same thing but in different contexts.
Every vehicle is equipped with myriad safety features such as anti-lock brakes, traction control, and blind-spot detection. However, the safety feature that’s arguably the most important yet remains out of sight is the airbag system.
Say you’ve been driving for several years now, and not once have you gotten involved in a major accident. You’ve been driving safely all this time, so what’s the point of having airbags if you never use them?
Although you may not have needed them in the past, there’s no telling what will happen in the future, and if you do end up in a serious crash you’ll be glad that you had those airbags there all along, even if you never needed them before.
When renting an apartment, many landlords require prospective tenants to demonstrate that they have valid tenant/renter insurance as a condition of tenancy. Even if some landlords don’t make insurance a requirement, it’s usually encouraged to get coverage anyways.
You may not need to file a claim for a very long time, if ever, but you’ll be glad you had that coverage if your apartment floods because of a pipe rupture or if your unit burns down due to a fire that started in your neighbour’s unit.
You could be the safest driver on the road, but you can still end up in a very serious accident simply by being at the wrong place at the wrong time. Similarly, you could be an extremely diligent tenant, but all it takes is a bit of negligence from your neighbours to wreak havoc on those living around them, including you.
There are so many external factors that have the potential to affect us, yet we have no influence over them whatsoever. There’s only so much that falls within our locus of control, so the best we can do when dealing with uncontrollable factors is to prepare ourselves to respond to sudden, unexpected changes as best we can.
The same idea applies to having backup investment strategies: your original plans may ultimately work as intended, and you may only need to make minor adjustments to them as you go along. In fact, you may never need to resort to any sort of backup strategy throughout your entire investment career.
However, any investor knows that there are myriad externalities that can completely throw them off course, and if they find themselves unable to re-adjust to get back to where they want to be, they’ll be glad they had backup strategies in place.
It’s much better to have something prepared and never need to use it, as opposed to urgently needing something but not having it. If you start coming up with backup investment strategies only after your original ones have failed, then it’s probably too late.
Investors stand to lose very little by creating backup plans: perhaps they’ll spend a few hours at most drawing them up, and at worst they may never need to be deployed, as we discussed earlier.
However, the potential benefits of having backups far outweigh the inconveniences: a few hours spent coming up with strategies B, C, and D may end up saving you tens of thousands of dollars, save hundreds of hours, and spare you from all the headaches you would’ve potentially experienced down the road had you not had them there in the first place.
Remember, Your Plans Don’t Have to Be Overly Complicated
When it comes to making investment strategies, they can be as simple or complex as you want them to be. As long as they help you move closer towards your desired goals, then it really doesn’t matter how you construct them. It’s tempting to fall into the mindset of “the more intricate my plans are, the more effective they’ll be at helping me reach my goals.” However, that isn’t necessarily true.
Many people, investors included, are under the impression that complexity is the same as efficacy. The more complex a system is, such as a computer, phone, vehicle, or plan, the more effective it is at performing its role.
This isn’t to say that complexity is something that should be frowned upon. Some systems are made up of thousands of smaller, important parts that can’t be simplified or reduced any further.
While complexity isn’t an inherently bad thing, problems start to arise when additional layers of complexity are added to a system that doesn’t need any more of it.
Modern vehicles are essentially just computers with wheels, with your average care containing millions of lines of code. Newer cars can be equipped with a vast array of features such as dynamic cruise control, automatic climate control, lane departure assist, parking assist, and even night vision.
These features are nice to have, but they don’t really affect the ability of a car to safely get from point A to point B. If anything, these extra features simply add more costs and require the vehicle to undergo more extensive maintenance.
The same idea applies when coming up with investment strategies.
At the end of the day, an investment strategy is nothing more than the actions an investor plans on taking at a specified time to achieve certain objectives. As long as they can do that, then it’s safe to say that the strategy is successful.
An investment strategy can be as simple as purchasing more shares of a stock at certain dates, or as complex as investing in different countries, in certain industries, at very specific points in the future. What matters is that you make progress toward whatever goal it is you’re trying to reach within your desired timeframe.
Adding additional layers of complexity that don’t provide any additional benefit is only a waste of time, and will only discourage you from coming up with backup investment plans because of the additional time needed to craft them.
While the importance of creating backups cannot be stressed enough, when does an investor know to abandon their original course of action and switch things up or if they should instead stay the course and see how things unfold?
Knowing When to Persevere or Pivot
In The Lean Startup by Eric Ries, one of the topics covered in his book is knowing when a startup should persevere or pivot: that is, should they continue with their original business hypothesis, or should they instead adjust their hypothesis and see what happens if they change course?
Obviously, this isn’t an easy decision to make, as there are valid reasons for both approaches, depending on the circumstances and the data you have available.
Investors are faced with the same conundrum when their strategies aren’t going as expected. Should they continue to stay the course of their original strategies and hope that some adjustments are all that’s needed, or is it time to abandon it entirely and try a different course of action?
To make matters worse, there aren’t going to be any obvious signs for an investor to take one approach or the other. Fortunately, this doesn’t mean investors are totally powerless when making this decision.
One way to help determine if a strategy is working as intended is to establish certain milestones you want to achieve by certain dates. If your strategy is able to consistently meet its targets on time within a reasonable error margin (e.g. give or take a few days/weeks/months depending on the context), then it may make sense to persevere. If not, then it’s probably time to start looking at your backups.
Another method of knowing when to persevere or pivot is to perform a cost-benefit analysis. It takes time, energy, and money to properly execute an investment strategy. Given how much you’ve spent up to this point, are the rewards you’ve gained worth it? If the answer is yes, again within your desired error margin, then perhaps it makes sense to keep going. If not, then maybe it’s time to try a different approach.
These are just a couple of ways to help determine what course of action you may want to take. However, each investment plan is unique, so knowing whether to persevere or pivot is something that would best be determined on a case-by-case basis.
Regardless of which approach an investor takes, the important thing is to stick with the decision they’ve made. Bouncing back and forth between choosing to persevere, then all of a sudden wanting to pivot, then abruptly going back to persevering will only waste your time and energy.
Wrapping Up
Investors come up with all sorts of strategies to help them achieve certain goals. Circumstances change all the time, so it’s very rare to find a strategy that remains completely unchanged.
While a few adjustments along the way may be necessary, sometimes circumstances change so dramatically that an investor may be forced to take an entirely different approach.
Creating backup investment strategies you may never need to use may sound cumbersome, but it’s much better to have backups in place and never need them, as opposed to desperately needing one but not having any on hand. Fortunately, backup investment strategies don’t need to be overly complicated for them to get the results you want.
Of course, a challenge every investor may one day face is knowing when to stick with the strategies they have right now or whether it’s time to change course. There’s no easy way to tell whether it’s time to persevere or pivot, so this is something that would best be handled case by case.
