A Successful Investment Journey Begins with Several Essential Steps

By Palladiem

Investing is challenging enough when you devote 100% of your time to it – anything less, and you’re courting failure. Markets are complex and swift moving, noise levels are high, and competition is intense. As an adviser, you likely spend a great portion of your time helping clients define goals, playing counselor, or managing your business. Consequently, what may be your too often neglected investment approach needs to contain both a solid framework and apply a strict discipline to best position your clients’ portfolios (and you) for success.

Most successful advisers have, or rely on managers who have, a common structure to their investment approach comprised of:

  • A well-defined investment philosophy that serves as the foundation for a solid and sustainable investment process
  • The investment process is well supported by empirical evidence including actual portfolio results, academic research and passes a common sense sniff test
  • The approach should capture elements of both investor and market behavior (momentum) and long-term investment fundamentals (valuation)
  • Execution of the investment process over time should demonstrate consistency but also be adaptive during changing market environments.

A well-defined and repeatable investment process is usually predicated on a common set of core beliefs. It’s our view that over longer-term periods, beginning valuations have been the strongest indicator of future performance. 30-year forward returns are significantly higher on average when investing at 10x earnings as opposed to 20x earnings.1 For equities, valuation can be measured multiple ways: price-to-earnings (historical or forward earnings), price-to-book value, price-to-sales, price-to-cash flow, price-to-vix, etc .  In the bond market, the current level of interest rates, the slope of the yield curve, and credit spreads are decent indicators of where the bond market is currently valued.

In the shorter term, however, many more factors can influence market behavior, often in competing ways.  These can include earnings expectations, macroeconomic data, tax and regulatory policies, fiscal and monetary policies, among others.  Momentum and large scale investor behavior driven by emotion can also have powerful effects. Swift changes in these factors, make constant and consistent monitoring a requirement if you want to separate trend from noise.

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