Investing is like fishing, but you can make your own luck

Recently I had the opportunity to go salmon fishing on Lake Michigan with clients and colleagues. We had a great outing when all was said and done because we brought fish back to the dock. However, we were out on the lake for five hours and caught five fish. That’s one fish per hour, which means a lot of downtime waiting for the next bite.

Truth be told, we were charter fishing, so we didn’t really need to be too involved with the gear until the fish was on. Fishing is like that, though; you spend a lot of time waiting for a few moments of excitement.

Have a plan

Investing can be like that if you don’t have a long-range plan with some financial goals. When the markets go through a period of low volatility like we’ve seen over the last year and a half, investors tend to become more complacent. Then when volatility spikes, they are surprised and begin to worry about what to do.

The benefit of a long-range plan and an investment policy statement is that the rules are laid out before you invest. When we went out charter fishing, there were six of us on the boat, including the guides. You are allowed to have three rods per person in the water. That is a lot of gear running behind the boat with different lures and at different depths. Imagine what a mess of lines that would become if the guides didn’t have a plan of attack and let us know what they wanted us to do when a fish struck.

One of the interesting things about fishing is the opportunity to find something very small in a very large body of water. You have to know where the fish might be, what depth they are feeding at, what lures they might be interested in, and how those lures should be presented. All of that varies depending on the type of fish you are trying to catch. This requires a plan and preparation to execute well. It also requires communication among those in the boat.

Asset allocation

We often talk about diversity in a client portfolio. Much like the example I just gave regarding fishing, we want to have a portfolio that includes investments from different asset classes because we know that markets can be unpredictable and different types of assets will perform differently over time. We’ve mentioned that our allocation to traditional stock and bond investments in the U.S. has dwindled over the last 18 months for a variety of reasons. One reason is that those markets have done well over the past five years and, as a result, we believe they will produce below-average returns in the next several years. In general, we have increased our allocation to complementary investments such as commodities and absolute return strategies that use different methods for generating returns than just owning U.S. stocks and bonds.

Communication

During periods of downtime, or low volatility, there is an opportunity to revisit your plan, observe your progress toward goals, and discuss your investment policy with your advisor. These are periods of high rationality. You and the advisor aren’t distracted by some market turmoil that tends to steer the conversation toward a variety of what-ifs rather than focusing on long-term goals.

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When markets move quickly — either up or down — investors can be beset by emotionally charged irrationality. That is why it is so important to use this time when things seem to be going well across markets to reassess your plan and goals. We incorporate a discussion about goals and modeling to understand what might happen in different economic and market environments. Then we draft an investment policy statement and review all of this information with regularity.

We go through this process so that, whether the markets are stable or volatile, we have a way of describing whether the plan is on target and goals are being met. The regular review provides an opportunity to learn whether goals have changed and if they are being met. When either the individual’s goals change or the market produces a result that is different from what’s intended, the plan and investment policy are updated.

We operate from a plan and statement of investment policy to help achieve our clients’ desired outcomes over time. Sometimes the best period in which to review these plans is when the market provides a little downtime. It helps ward off complacency and prepares us for future periods of volatility.

Brian Andrew is president and chief investment officer at Cleary Gull, Inc., an investment advisory firm in Milwaukee. He leads the firm’s investment research and strategy and chairs the Investment Policy Committee. 

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