A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.
Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.
Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?
Key to a successful voyage is a good navigator. A trusted advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the advisor may suggest you replot your course.
As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced advisor will work with the conditions.
Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.
Circumventing the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes are the enemy of many a long-term financial plan.
Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.
‘‘ Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006. The articles are designed to help advisors communicate with their clients about the principles of good investment—working with markets, understanding risk and return, broadly diversifying and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and discipline. Jim’s flags metaphor has been taken up and recognised by Australia’s corporate regulator in its own investor education program.
For more articles, visit Dimensional’s client site atmy.dimensional.com/insight/outside_the_flags
This article has been prepared and is provided in Australia by DFA Australia Limited (AFS Licence No.238093, ABN 46 065 937 671). The article is provided for informational purposes only. Any opinions expressed in this article reflect the authors judgment at the date of publication and are subject to change. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly. ©2016 Dimensional Fund Advisors LP. All rights reserved. Unauthorised copying, reproducing, duplicating, or transmitting of this material is prohibited.