written by
Dr. Jan-Patrick Cap
In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing
Theodore Roosevelt, 26th president of the United States
Key decisions, indicators and rules are the basic tools to control your investments. Learn in this article, how to apply them.
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
Paul Samuelson, American economist and the first American to win the Nobel Memorial Prize in Economic Sciences
The Key Decisions describe the investor’s principles for decisions in implementing his investment philosophy. The indicators and rules are used to support or fully determine the key decisions.
Examples of key decisions include changing the equity allocation, e.g. when the strategy changed and the investor wants to take more or less risk. Another example is rebalancing the investments after market movements or changing allocations to individual instruments within a given asset class (e.g. stock picking, regional allocation etc.).
Only two people can buy at the bottom and sell at the top- One is God and the other is a liar.
Vijay Kedia, Indian investor who was described by Economic Times as a "market master"
Due to market fluctuations your portfolio is not always the way as you planned it in the Investment Canvas. Let’s assume you have 50% of your assets in equity and 50% in Cash & Cash equivalents. The equity market goes up 5% and you only get a 2% return from your cash and cash equivalents. Then the percentage of the value in your portfolio of stock will rise as well, e.g. now you might have 60% of your investments in equity and 40% in cash & cash equivalents.
Rebalancing describes the realigning of the portfolio according to the original strategy. This ensures that you take market gains and bring them into more secure investment classes. On the other hand, it ensures that you buy asset classes that are going down in value so that you have the potential for gains when they come back.
Sometimes there are major market movements in some instruments. You might want to leave an asset class when a major event happens. You can usually automate these decisions, e.g. in the stock market you can set a so-called “stop-loss”. This means your stocks automatically go for sale when they lose a certain absolute value or a percentage of the value.
Also, you should have a regular review of the strategy you defined in the Investment Canvas. Your objectives might change, e.g. you were saving for a sports car but then you became a parent. Therefore, we suggest to at least annually revisit your strategic asset allocation. Also, every year you will learn more and more, this means you might want to use your experience to go into other instruments as your knowledge increases.
As a basic set of key decision, indicators & rules, we suggest:
You are free to add more rules according to your strategy in the investment canvas.
There are three basic items that you must understand to control your investments:
Key Decisions are the basic assumptions of your investment strategy and how to control them. E.g. you have defined a strategic asset allocation and you have to rebalance every now and then. This rebalancing is lined to the key decision when to rebalance (after a specific time, after being out of balance a certain percentage, etc.)
Indicators are numerical values to quantify the key decision
Rules are the link between key decisions and indicators and enable the controlling