Investment Management requires (i) an analytical skill set, (ii) a dispassionate approach to the chosen investment methodology, (iii) an understanding of how the securities and other markets operate, (iv) an understanding of how investment risk can be managed, and (v) the discipline to strictly follow the investment protocols of the chosen investment methodology in up and down markets. Exceedingly few clients have all of these skills.
There are several reasons for this. First, investment management is rarely the client’s chosen career so it is only a small part time activity. The point is that the task requires a professional not a part-timer. Second, the emotional element of dealing with one’s own money/assets is extremely difficult to eliminate in the investment management decision making process. Typically, it results in serious miss-judgments. Numerous studies have proven this to be a fact.
The miss-judgments include the timing of purchases and sales, chasing of the latest headline investment, failure to follow the discipline of the selected investment methodology, failure to understand and manage investment risk, pursuing unreasonable returns in a market that will clearly not produce them, panic reactions to adverse market movements, and the like.
A successful investment program sets the client up for success by first establishing identifiable investment goals that are likely to be reached within an acceptable level of risk. This provides the client with a way to measure over time the progress in reaching the established financial goals. The point of this is, who cares what the securities markets are doing from time to time if you are on track to meet your goals. The goal is certainly far more important than how one gets there because the financial goals translate into personal lifestyle and enjoyment.