Overview – How Do Three Seemingly Disparate Elements Blend Together?
In past articles, we discussed three major elements that every investor needs to guide their overall approach to investing: investment goals, investment strategies/plans (specifically, the importance of understanding that those strategies/plans are subject to frequent change), and investment paradigms.
It’s very difficult to achieve sustained, long-term success without these things, so having them clearly outlined is important. That being said, simply having goals, strategies, and paradigms in mind isn’t enough. The other challenge is knowing how to integrate these distinct elements into a single, holistic system.
In this article, we will revisit investment goals, strategies, and paradigms, but this time with a focus on how they influence (or are influenced by) the other two. Ultimately, the goal is to discover how these three variables come together to form one, unified system.
Investment Goals – Knowing Where You Want to Go
Every investor, whether they explicitly admit it or not, has some sort of goal(s) they wish to work towards. After all, why take the time, effort, and energy to become an investor if you don’t know what exactly you’re trying to achieve? Sure, there may be some people who take part in investing simply for the fun of it, but for most investors that likely isn’t the case.
Investment goals are the starting point of every investor’s journey because they dictate what investors should channel their time, effort, and energy towards. Every investor’s definition of “success” is different because they all have different goals they wish to work towards and one day achieve.
Whether it’s creating a portfolio big enough to pay for most of their living expenses, or passing it down to their children to secure the financial stability of their descendants, everything an investor does starts with the goals they have in mind.
Without clear investment goals in mind, it’s very hard, if not impossible, to achieve any sort of long-term success. After all, how many people do you know in your own life that have gone on to achieve major success simply by wandering around aimlessly? Investing is no different in that regard.
Investment Strategies – Paving the Way to Your Objectives
Knowing where you want to eventually end up in your investing career is important, but that only represents part of the equation. Clearly defined investment goals are important to have, but if an investor doesn’t have the slightest clue on how they’ll work towards them, then those goals will serve as nothing more than empty dreams.
Imagine your ultimate goal as an investor is to pass on your portfolio to your children someday, with the hopes of creating lasting generational wealth. While certainly a noble goal to have, what exactly needs to be done to ensure that goal is achieved?
What sort of investment instruments will you include in your portfolio, what sort of portfolio composition are you trying to create, and how will you use the dividends/interest your portfolio generates, among other considerations?
If an investor’s goals serve as the end destination they hope to one day reach, then the strategies they deploy are the specific actions they will need to perform in order to get there. Investment strategies are the bridge that turns goals from simply being dreams into something tangible that have a realistic chance of being achieved.
Goals and strategies go hand-in-hand. Lofty goals without having any concrete steps to try and achieve them are nothing more than distant dreams, whereas impressive strategies without a clear objective in mind are just elaborate ways to waste time. The existence of one of these requires that the other must also exist.
An investor’s strategies can be as simple or complex as they want them to be: what matters is that their strategies ultimately move an investor that much closer to achieving their goals.
Investment Paradigms – An Investor’s Underlying Philosophy
So far, we’ve discussed how an investor’s goals are the ultimate objectives they’re trying to work towards, while their strategies are the specific actions they’ll need to take in order to achieve those objectives. If one exists, then so too must the other.
Despite having clear goals and strategies in mind, there’s still one missing piece that underpins both of these things. What is it?
Let’s go back to our previous example of wanting to pass your portfolio to your children with the hope of creating generational wealth. You have a clear goal in mind, and you’ve begun to think of different strategies to help achieve that goal.
However, what determines the kinds of strategies you come up with, and how do you know which ones you’ll go with? After all, there are various ways you can go about creating generational wealth via your portfolio, so how can you tell which approaches are sensible and which ones aren’t?
The answer lies in the investment paradigm you abide by.
As a quick refresher, investment paradigms are the overarching intellectual frameworks that dictate how an investor thinks, acts, and behaves. Therefore, investment paradigms also influence the types of strategies an investor chooses to use.
Back to our example, an investor who adheres to the value investing paradigm will take a very different approach to achieving their goal than ones who abide by the growth or defensive investing styles. Different paradigms follow different types of ideals, so it’s no surprise that they’ll take different approaches even when trying to work towards the same thing.
Remember, there’s no “correct” investment paradigm to follow, just ones that align best with an investor’s aptitudes, values, and ways of thinking.
It’s easy to say “Come up with strategies to help achieve your investment goals”, the hard part is coming up with a satisfactory answer as to why you’ve chosen to pursue those specific strategies and not others. With an investment paradigm in mind, answering that question becomes a lot easier.
How These Elements Form a Cohesive Whole
Now that we’ve gone over how these three elements relate to one another, it’s clear to see how unique they are, and how each of them serves a specific purpose when it comes to advancing an investor’s career. Not only that, but we now have a clear understanding of how exactly they come together to form a unified system.
Goals serve as an investor’s guiding light and the final destinations they hope to someday reach, strategies are the specific, detailed actions that need to be taken in order to reach those destinations, while paradigms influence what sort of strategies an investor comes up with and ultimately pursues.
We can demonstrate this relationship visually as shown below:
Notice how if we were to remove just one of these elements, this system falls apart. All three of these things must be clearly fleshed out in order for this system to work at its full potential.
Wrapping Up
While many investors have the ability to come up with ambitious goals, draw up impressive strategies, and choose to abide by one of many paradigms, some investors fall short when it comes to understanding how these three different and seemingly disparate elements relate to one another.
Despite being three unique elements, each of them influences or is influenced by one of the others. The goals you set influence the types of strategies that will be used, and the paradigm you abide by influences the sort of strategies you come up with.
If an investor takes the time to properly flesh out these three elements and understand how they all complement one another, then they stand a very good chance of enjoying sustained, long-term success.
