The Independent Market Observer | Outlook. Opinion. Insight.

How I Plan to Invest

Written by Brad McMillan, CFA®, CFP® | May 18, 2018 5:50:51 PM

After going through my investment thought processes over the past couple of days, today I am going to outline—in general—what I actually plan to do with my excess cash. So, let’s revisit some of the ideas we’ve talked about this week.

Fear versus greed

With markets high but still trending upward, do I buy in now and take the risk of a decline? Or do I wait and take the risk of missing out? I don’t have a good answer for this one. As such, I will be phasing in my investments over time—a process known as dollar-cost averaging. By doing this, I can participate at least partially in the upside, but I also have the ability to put money in at lower prices in the event of a downturn. It’s not a perfect answer, but the best available.

Target allocations

The core of the portfolio, and the vast majority of the holdings, will be in standard asset classes: fixed income, stocks, U.S., and abroad. These investments will allow me to benefit from economic and corporate growth over time and to do so in a disciplined, diversified way. This strategy is the core of any successful investment approach, and it will certainly be the core of mine. It is what actually drives investment success for almost everyone, and I don’t think I am good enough to step too far away. This strategy works, over time, and it gets me where I want to go. Enough said. I do, however, have some thoughts about how to make that excellent strategy even better.

Active versus passive

For me, it is too hard and too uncertain to try to beat the markets for large, liquid companies. For my allocations to those types of companies, I am using passive investments and focusing on getting them at the lowest cost. For smaller companies and companies outside the developed markets, I am open to using active managers and paying for it. But I want to see convincing evidence that they are really doing what they say and that it adds value. Here, I have the advantage of the Commonwealth Investment Management and Research team, which spends all day, every day, looking at just that. Part of what we do is find the best managers, in the most appropriate asset classes, and take advantage of them. Our advisors and their clients benefit accordingly, and I want to as well.

Risk management

When I look at the economic and market risks every month here on the blog, one of the key assumptions is that management is actionable—and it is. I plan to manage my allocations actively, pulling back on risky areas and then moving back in as risks subside. The 200-day moving average, which I have written about before, is one such tool that I consider, and historical data shows that such an approach can meaningfully reduce risk. I am 52, and reducing risk—especially in today’s market environment—has a lot of appeal. In fact, I am finishing up a book on how to do just that. (I will certainly announce it here when done!)

Deliberate bets

I also reserve a small part of my portfolio to make active bets. I don’t have a specific process in mind. But occasionally, given my job, I see something compelling that warrants action. Note that this will be additive to the main portfolio, rather than a core part, and that failure here won’t prevent me from achieving my broader goals. I am confident, but not too confident! One area where I spend time considering bets is major news events—did the market overreact? Another is changing trends—are oil prices coming back? Best of all is when you get both at once. Again, this is something you probably shouldn’t try at home and something I have very modest expectations for. But it is something I plan to spend more time on, not least to focus my analysis for the benefit of Commonwealth’s clients.

A consistent process

So, there you have it! Most of my portfolio will look like yours, if you are a Commonwealth client, because what we do is actually quite good. Some will be based on my own research and work. If I don’t trust it enough to act on it, why should you? And a small part will be active bets, in a controlled and thoughtful way, when I see markets out of whack.

This has been an interesting set of posts to write. It has helped me clarify my own thoughts, and I hope it has helped you organize your own. In any event, the actual results will no doubt change with market conditions, but the thought process will remain constant. Good investing!