Long-Term Investing Made Simple

The one thing that an investor can count on is that things are going to change. All things, investments and investment styles, cycle up and down. We just don’t know exactly when cycles will change, but they will. Even buy and hold investors, bolstered by years of academic research telling them their system was good, realized that things can change when they took massive losses in the 2001 and 2008 declines.

All investments start out as good investments. Clearly, no rational investor puts money into something that looks bad, and in fact, the vast majority of investor moneys go into investments that are showing good track records.

Many investors noticed that when markets change, even “5 Star” investments can get hit hard and when that happens financial plans based upon holding a set portfolio of investments often end up not being worth the paper they are written on. The worst part is when investors can tell something is wrong but their advisors don’t have answers beyond “be patient”.

For 30 years I have been developing an investment decision-making process that fills the gaps between what investors expect and what the investment industry is able to provide. The process I advocate is an all-inclusive one that provides everything an investor needs. It is rooted in time-tested, highly respected investment principles, and it also features strategies that can Adapt to Changing Markets®.

The final product includes the simplicity of buy and hold, yet can also relieve you of the handwringing and the anxiety of the “What should I do now?” moments.

The Key

3-D Diversification is the cornerstone of our work. Most investors and sadly most investment advisors are only aware of the first two levels of diversification which creates the biggest flaw I see in financial plans brought to me, lack of effective diversification.

The first level of diversification requires a risk analysis to determine how comfortable you are with money in stocks or lower risk, income-producing investments, such as bonds. Over the long term, stocks return twice the gains that bonds do, but with greater risk, too. Usually, this analysis leads to a recommendation of a mix of investment classes that historically have produced the greatest return for the level of risk you are comfortable with.

Ordinary financial planners ask a set of questions and assume your answers will never change. However, your answers are certain to change along with changes in the markets. Investors love stocks in strong markets but fear them in falling markets. So rather than be anchored to a fixed investment mix such as the industry-standard 60%/40% split, portfolios at Hepburn Capital feature evolving investment mixes to better keep us in sync with major market trends.

The second level of diversification is widely understood: Don’t keep all of your eggs in one basket.
Be sure that within each investment category you don’t own just one investment, own a bunch, and we do that for you, too.

But most investors have never considered the third dimension of diversification, using multiple strategies. Think about it. How many investment strategies can you name? At Hepburn Capital, we usually have several growth strategies, such as value investing or future technology stocks. Also, several income strategies such as US government bonds or dividend-producing stocks may be employed at any one time. Each strategy focuses on different subsets of investments and uses different criteria for investment selection. Just like an individual investment, if a strategy begins to underperform it is replaced with another strategy more in tune with the current market environment. We do all of this automatically for our clients and call it Adapting to Changing Markets®.

Many investors don’t need to know much more, because this level of pro-active management is much more than they have ever gotten before. But there is much more that creates value for Hepburn Capital clients.

Each strategy uses underlying tactics to manage short-term market fluctuations, tilting toward the preservation of account values in rocky markets, and striving to have money grow in strong markets. The easiest way to have your accounts grow is to have more money in investments that are going up and less money in things going down. To pursue this objective, every investment we own is filtered to see if its trend is staying positive. If not, it is sold.

A different way to manage the market risk is to add an inverse investment that goes up as the original investment goes down. This tactic is called hedging and it is like a shock absorber for your investment portfolio.

Please understand, the goal of this process is not to continually outperform stock indexes or magically time the markets. Our objectives are to reduce your risk of ever having a life-changing financial loss, and give you a more satisfactory investment experience. If we occasionally beat the markets, that is just a bonus.

The Takeaway

Regardless of how good your investments seem, do not assume that they will perform well in all markets. It is essential to your financial success that you have a plan to deal with changes in the market environment. If you aren’t equipped to do this, find someone who can help you do it. That is where we come in.

Whenever we buy an investment for your portfolio, we calculate when we will know the market trend is moving against us and set a sell point at that level. The alternative is to potentially ride a previously good investment into a market bottom and lose many years of gains.

There is an old saying that says even if you are on the right track, if you just sit there you will get hit by a train.

© 2016. Hepburn Capital Management, LLC