I briefly discussed the concept of robust investment portfolios in my previous post. I emphasized the importance of having sufficient humility to acknowledge we’re unable to predict the future and to have an imagination that recognizes there are a lot of possible outcomes that we don’t normally and naturally consider. Basically, we need to be open to the fact that the future will likely happen a lot differently than what we currently envision and/or than what others are suggesting.
Courage also plays in robust investment portfolios. When we discuss portfolios we think of asset allocations and construction. Those are obviously very important pieces in the portfolio construction process but as I mentioned before having the right foundation in place is probably the most important piece. Courage is a foundational piece along with humility and imagination. Having the courage to not follow the masses in buying during a mania or in selling during a panic is essential. Robust portfolio outcomes are largely tied to our ability to manage the biggest risk to our investing success…ourselves.
Courage also comes into play in the portfolio construction and management processes. Having the courage to deviate from long held beliefs that are no longer supported by real world evidence. Having the courage to remain disciplined in allocating assets even when the market is going against you in the short-term (assuming you have high conviction). Having the courage to make intellectually uncomfortable decisions to change allocations and/or strategies based on supporting evidence.
All of what I have discussed requires quite a bit of hard work and can be uncomfortable but in the long run is worth it. Getting a handle on our emotions and biases can be the most challenging for some while conducting the necessary research and analysis is more challenging for others. One thing is certain, we live in very interesting times domestically and globally. I’m concerned that what’s worked over the past several decades may not be the panacea it has been historically. I sincerely believe we can’t look to the past with as much confidence as a guide for the future. So much of what we do in the investing world has developed and evolved as a result of human ingenuity, which is amazing and the number one reason to be optimistic going forward. However, unforeseen changes and unintended consequences arise as part of the disruption process. Being humble, imaginative, courageous and flexible will provide the greatest chance for success.