Over the years, I have worked with individual investors of all kinds, spanning a wide range of affluence. In that time, some distinct principles have emerged about how wealthy investors successfully protect and grow their assets in up and down markets.
These techniques are available to a broad investor population, and the success factors are not hidden or complicated. But they require attentiveness, focus, flexibility, and discipline.
First, you need to know yourself -- your personal characteristics (such as family responsibilities, working age, and chronological age), your mentality and investment temperament, how you deal with losses and gains, your affinity for investing, and some idea of your ability and willingness to tolerate risk.
Second, you need to truly diversify your investments, with a judicious, appropriate mix of assets that are uncorrelated. That means they don't all move in the same direction at the same time. You'll have some winners and some losers, but over time your aim is to achieve more victories than losses.
Third, from time to time, you have to rebalance your portfolio back to the long-term strategic asset allocation mix that fits your risk profile, your goals, and your financial personality. Rebalancing requires selling assets that have rapidly appreciated in price, and buying quality assets that have declined in price. This generally affirms the principle of "buy low, sell high," and helps to keep your portfolio on track.
Fourth, pay attention to portfolio protection and risk management, by: insisting upon having good asset managers (especially in the less efficient
asset classes, such as
small-cap stocks, emerging market equities, real estate, hedge funds, and venture capital); being mindful and vigilant of what could go wrong in an investment instrument or an investment plan; and seeking out some form of protecting the portfolio, through the use of above-normal cash positions,
put options, and negatively-correlated asset classes that zig when others zag (such as precious metals, commodities, managed futures funds, and inflation-indexed securities). Some of these investments may not be suitable for all investors.
Finally, you need a trusted, wise, independent, caring person to bounce ideas off of, who wants to see you do well, and who will keep you on the road when you begin to veer onto the shoulder or into the ditch.
David Darst
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