Recent market events may leave some investors questioning whether now is the right time to change their portfolios. Since stocks are falling and bonds are rising, there’s plenty of reason to wonder which way to go. Historically, recessions are a natural part of the economic cycle, occurring on average every 3.25 years in the United States. History also shows that the best time to buy stocks was when the National Bureau of Economic Research (NBER) announced the start of a recession. Though the U.S. isn’t in a recession, we may be heading for one.
Whether a new or seasoned investor, knowledge is the key to strengthening skills. Economic conditions wax and wane, and knowing when and how to make moves is just as important as the moves made. Bringing in additional perspectives from experts can help.
Thomas A. Carver, managing partner at Harren Equity Partners, offers an investment blueprint everyday Americans can use to minimize risk and grow wealth. Under his guidance, the private equity firm manages nearly $800 million in assets, including projects with Virginia Title Company, Alliance Ground International, and Velosio.
Carver offers several cornerstones to help people build a solid investing strategy:
- Create and follow a budget (Sporadic investments may hurt more than they help)
- Don’t know or understand it? Don’t invest in it
- Be strategic about risk and return
- Plan for success, but prepare for failure
- Don’t take the results personally
It’s certainly possible to get lucky with an investment here and there, but budgeting for investments will help investors reach financial goals faster. Set aside a certain amount every month and make consistency the goal. Investing larger sums of money sporadically may come with more costly mistakes than smaller amounts more often.
Carver says, “You need to know what your goals are first, and then work backwards to figure out what you need to allocate and what rate of return you need to achieve those goals. The more consistently you invest, not only will you achieve more compounding growth in general—you’ll also become a more proficient investor so you’ll begin to generate better returns over time. When you combine the two, you’ll accumulate significantly more wealth over your life.”
Know what the finish line looks like, how much money it will take to get there, and find and invest in the necessary things to get the required return to reach it.
While it may be tempting to invest in the “next big thing,” if investors don’t know the industry or its driving forces, it’s best to leave it alone.
The deep understanding of the business, the industry, and other factors allows investors to see what others miss, both in terms of opportunities and bad omens. For Carver, that’s buying and selling businesses, which for him, translates to largely ignoring other assets. He says, “I have a lot of opportunities coming my way, but I always decline the ones that aren’t in my ‘genius zone’ because that’s where I’m more likely to make mistakes.”
He recommends others choose an area of deep interest or passion and focus their efforts there to have the best chance of success. The saying goes, “Risk equals reward,” but when it comes to investing, this is not solid advice. Many people mistakenly believe this means the greater the risk associated with the investment, the greater the return, and sadly, rather than riches, it often leads to financial decline. The real risk? The lack of necessary knowledge for strategic moves.
I saw a great example of this in a recent article, where Tom Carver was interviewed at Newsmax.
In Vegas at a roulette wheel. Which bet is riskier? $20 or $20,000? Most would say the larger bet comes with more risk, but looking at the math? Both bets assume the same risk. The difference is only the impact of a loss. Can most afford to lose $20? Probably. Can most afford to lose $20,000? Absolutely not, according to a recent Bankrate study. And that’s why understanding the risk isn’t just about the math.
The Securities and Exchange Commission (SEC) defines risk tolerance as “an investor’s ability and willingness to lose some or all of an investment in exchange for greater potential returns.”
Everyone has a different risk profile, and the average American has a low risk tolerance because they don’t invest time and effort into their investment opportunities before investing. Less risk is better for those who don’t know how to perform under pressure or suspect they will choke once backed into a corner.
Carver explains, “You have to know how you’re going to perform under pressure. Will you step up and make it work or will you choke when you’re backed into a corner? Your answer to that tells you exactly how much risk you should take.”
Investing with a plan is always better than flying blind, but flexibility is also crucial. Having backup plans, and making adjustments as new information comes into play is key. Failure will happen at some point; it’s inevitable.
Unfortunately, many investors make the mistake of burying their heads in the sand once an investment starts to go south, hoping for a recovery that often never comes. Rather than sitting around and hoping for an uptick, it’s more often wise to cut losses and fail fast or make dramatic adjustments to change things. Investors can’t do anything about some investments, but it’s important to learn from mistakes rather than letting them become bigger because of fear of failure.
He explains, “If you’re going to fail, fail fast so you can course correct fast. Instead of sitting around hoping things change for the better, you need to either cut your losses and move on, or make the appropriate changes to turn things around. And with some investments, you can’t do anything but take your bruises and hopefully learn something from the experience.”
With investments, it can be difficult not to take the results personally, often attaching value to results. Carter maintains that investors need to treat performance as data we can learn from rather than as an indicator of our worth. He says we should use the information to help improve our ROI, spot hidden risks, and make better investment decisions in the future.
“Ultimately,” he says, real wealth “is our family and friends, health, freedom, and time.”
I’m inclined to agree. We can always make more money, and even recover from significant loss, but our family and friends, health, freedom, and time are finite.
