“How should I think about investing?” is a question I wish a lot more people would ask. Why? Because there is so much more to investing - investing well - than what you should put in your portfolio and who you should get to manage it for you.
Oh great, I can hear you say, Sandi wants me to navel gaze or “design think” or whatever about something else …first cash flow, then retirement and taxes, now investing? In the end, everyone has the same goal, right? To get out more money than you put in and not get ripped off while doing it?
Fair point. But the universal goal of “growing your savings” can be approached in so many ways (Low-vol! Smart beta! Passive! Liquid Alts!) that a solution-focused, action-oriented, preferred-future creation system - a.k.a. design thinking - is the best way I know to equip you to make the right choice...for you.
That’s what I mean by “investing well,” by the way, not just “making the most money possible,” but feeling good while you’re doing it. You believe in your process, have confidence that you’re doing what you can to reach your goals, know exactly what your job is, and are spending your time reading books, walking your dog or getting a tattoo instead of worrying about your portfolio.
Here’s a quick refresher on the steps involved in applying a design thinking to any situation::
Empathize: Gain an empathetic understanding of the problem you’re trying to solve – typically, through research. Empathy is crucial to a human-centered design process because it allows you to set aside your own assumptions about the world and gain real insight into alternative perspectives.
Define: Accumulate the information you created and gathered in step 1. Analyze your observations and synthesize them to define the core problems you have identified so far.
Ideate: Generate some ideas. The solid background of knowledge gained in the first two phases allows you to start to think “outside the box,” looking for alternative ways to view the problem and identify innovative solutions to the definition you created in step 2.
Prototype: This is an experimental phase, with the aim of identifying the best possible solution for each of the problems identified in the first three phases. Produce a number of possible solutions to investigate.
Test: Now that you’ve got a few solutions, it’s time to test them out to see if any of them gain traction and/or actually get you where you’re going. While this is the final phase of the process, the results could bring you all the way back to step 2, with new, or more robust, definitions of the issues you are solving, which allows you to come up with new, robust ideas, prototypes, and tests.
Investing: Empathy
You have fEeLiNgS about your investments, whether you’ve got a single penny or many pennies invested. I know you do - because everyone does. Maybe it’s a deep suspicion of the whole capitalist system, maybe it’s a family history of wealth, maybe it’s the pride of making a great call at the bottom of the last market correction, or maybe you’re just downright terrified, but you’ve got (valid) feelings about investing. Take them out of your pockets, spread them out on the floor in front of you, and really examine them.
This is important, hence its position at the top. Unexamined feelings are what cause so, so many people to make terrible, no good, very bad, horrible decisions with their investments (professionals included). It’s also kind of difficult and sort of squishy, so here are some prompts to help you get started:
What does “risk” mean to you? Is it something to avoid, something to take advantage of, or something else?
What’s the worst thing that could happen to your portfolio in the next five, ten, or twenty years? The best?
Is there anything you would never invest in? Anything you’d always invest in?
What has your past experience been with investing - what have you lived through, and how did you feel about it while it was happening? How do you feel about it now?
Empathizing is also about researching alternative perspectives. This will help you start anchoring your feelings and unique history to the experience, history, and evidence of others. The caveat here is that every opinion possible is yelling at you, so how can you possibly know what to pay attention to? Here are some good places to start:
Read: The Value of Simple by John Robertson
Read: The Laws of Wealth by Dr. Daniel Crosby
Engage your critical thinking skills, soak up a bunch of knowledge, and start to get a sense of how investing has worked over time, how it may work in the future, and where you and your feelings fit. (This is a lifelong process, by the way. Forewarned is forearmed.)
Investing: Define
In this step, you need to write yourself an Investment Policy Statement that pulls together what you’ve discovered about yourself and the world of investing in Step One and seats it firmly in the context of what your investments actually have to do for you.
This statement doesn’t necessarily have to be fancy or professional. John Robertson’s book has a great example of a policy statement written in plain language about real life, and is a perfect template for how you’ll capture these thoughts for yourself.
If you’re working with a financial planner, doing this defining work should be part of the engagement. Policy items might include things like:
What are your investments for? Are there separate investments for separate goals? (A classic example of this would be saving for your kids education with one set of investments and saving for your retirement with another set.)
What minimum average rate of return do you need to earn over the amount of time you have available to meet your goals?
What kind of risks are you not willing to endure? What’s the absolute worst-case scenario that you would be able to tolerate?
How much are you able to contribute to your investments on a regular basis?
How involved do you want to be in the regular management of your investments?
If you hire someone to manage your investments, what is non-negotiable for a relationship to be worth the cost? How much would you be willing to pay for this over your lifetime?
Investing: Ideate
Again, this step may be something you work with your friendly neighbourhood financial planner on, but at its most basic, investing ideation involves creating a set of livable options that you think fulfill your investment policy.
For my clients, this ideation step may take the form of an investment manager search, and a shortlist of portfolio management options that could include companies and people we’ve worked with in the past who seem to fit what you’ve defined. (It bears repeating that we do not accept referral fees, fancy vacations, or anything else beyond a nice thank you note from anyone we put on a shortlist.)
For others, this step may look like finding a few investment philosophies that have really resonated in the empathizing step and seeing how they might fit with the results of the defining step, like so:
Given how involved you want/don’t want to be, is one of the Canadian Couch Potato do-it-yourself model portfolios a good fit?
For the relatively high cost, is the convenience of dealing with your local bank branch worth it?
If you absolutely cannot tolerate seeing the value of your investment drop by more than 20% over a couple of short months under any circumstances, is that 5% average annual rate of return you need to earn over the next 15 years even possible?
Investing: Prototype
This step is a little difficult when it comes to investing real money, since the only true test of any investment policy is over a complete market cycle (think: in good times and in bad) and with real money (to see if that 100% equity portfolio you think you can stomach gives you an ulcer or not. Fake money does not, historically, give ulcers).
Past market history can give us some clues about the probability that a given idea will live up to your investment policy, although the danger here is that some of the really clever investment policies out there are actually just gigantic, risky bets that future market performance will be exactly like past market performance. Tread carefully here, and think seriously about talking to someone with what Tom Bradley at Steadyhand calls “accumulated regret,” or many years of market participation and the wisdom that comes with seeing clever theories fail miserably in real life.
You definitely want to talk to the people who will be putting your portfolio ideas into practice if you’ve decided to consider hiring a professional manager. Talk to everyone, and consider the ideas they offer to fulfill your unique investment policy against the ‘Seven Ps’.
Investing: Test
If you thought prototyping was hard, I’m sorry to say that testing is harder. The thing about investing - unlike cash flow or taxes, but just like retirement - is that feedback comes in slow motion. A very good financial planner or portfolio manager is going to make sure you’re prepared for some almost random combination of good years, bad years, and sideways years…all adding up over the long-term to that average rate of return you needed to reach your goals…hopefully.
While I hope we’ve convinced you to take your time and avoid throwing your money at the first five-star fund your banker sells you, I’d encourage you to set yourself a deadline for getting invested. The best weapon you have against all the random bullshit the market can throw at you is time...many, many years of cheerful company growth, happily compounding interest, and sweetly re-invested dividends. At a certain point in investing - as in most things - the perfect can become the enemy of the good.
Knowing when to make a change in the way you invest is a really tough call, and the last thing you want to do is skip between investment policies without a very good reason (which you’ll come to by going through this design thinking process). If you change your investment policy because you didn’t earn 5% per year, every year, or because your neighbour’s investment guy made a killing in [insert latest fad thing here] then you’re going to pay a very high price over your investing lifetime, guaranteed.
No one (that we know about and/or have access to) can control market performance. At best, we can control emotions, expectations, cost, process, and the people we hire to help us. Design thinking can help you make well-reasoned investment decisions that are right for your situation, whether you’re just starting out or thinking about making a major change.