Investing – Measure Twice and Cut Once
September 14, 2021
An Investment Policy Statement helps reduce common mistakes investors make, writes Peter Watson.
People make mistakes. That can be costly.
There is a popular expression used when doing carpentry work. Measure twice and cut once. This is just another way of saying be careful not to make a mistake.
Making a mistake with your investments can be expensive. It could interfere with you being successful at meeting your financial objectives.
A useful strategy when investing is to follow the measure twice cut once idea. It is to develop an Investment Policy Statement before making investment decisions.
Investing then is a two-step process. Plan what you want to do. Then implement that plan.
An Investment Policy Statement outlines your investment goals and objectives. It considers how much risk you are prepared to take. Decide the asset allocation between investing in stocks and bonds. Determine your liquidity requirements.
There are three common mistakes that are easily made when investing without the foundation of an Investment Policy Statement.
One. Assuming too much risk. You fall in love with one particular type of investment and consequently your portfolio does not have the diversification necessary to manage risk.
This happens often. People are more comfortable investing in things they understand. Once they think they understand a particular investment they are more comfortable by adding more of the same investments to their portfolio.
Two. Not take enough risk. Stocks can loss value but investing too much in bonds will likely not provide you with a high enough return.
Usually, the motivation for being too risk averse is the fear of normal stock market volatility. Volatility is a normal characteristic of long-term investing in stocks.
Three. Avoid making investment decisions. Without the context of some sort of roadmap for investing it can be an easy mistake to procrastinate and just avoid making investment decisions.
Our recommendation; investing is a two-part process.
First develop an Investment Policy Statement. Then invest.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.
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