Our Path

When we invest, we are looking to the future. We want and expect our investments to grow in value over time, to be a resource we can rely on. We may plan to use our investments as an important source of income when we're no longer working. We may want to leave a legacy to our children and grandchildren. We may have in mind to give money to charities that are important to us. Whatever the case may be, we are thinking ahead, and the difficulty is we can't know what the future will bring. We can, however, make intelligent estimates, understanding what we can expect from our investments over shorter periods of time – day-to-day, month-to-month, quarter-to-quarter, year-to-year, whatever frame of reference we may find helpful – and at points in the more distant future.

Understanding what we can expect from our investments over shorter periods of time is an essential first step. Thinking this through, imagining how we would feel and react under different political, economic, and market conditions, allows us to settle on a target allocation for our investments that makes sense for us, one which we can hold fast to in good and bad markets alike. If we don't make an effort in this direction, we leave ourselves open to being buffeted by volatile markets and provoked into harmful investment decisions. “Buying high” when all seems right with the world and “selling low” when all seems wrong are two of the most common and damaging mistakes investors make. If someone repeats these mistakes two or three times, he is almost sure never to be a successful investor.

So step one, find a target allocation we can live with no matter what markets are doing and invest accordingly, making sensible asset location decisions to arrive at our target. With our investments in place, we can think ahead with our goals in mind. How are we likely to be faring in five years, ten years, twenty years, thirty years, whatever points in time are important for us? What if markets do especially well? What if they do especially poorly over the investment years that matter most to us? How likely are the different results? What kinds of corrections might we have to make along the way? With answers to these questions, we can take sensible actions now regarding financing our retirement, transferring wealth to loved ones, making charitable gifts, whatever may be our particular wishes, knowing that we may need to make adjustments depending upon what the future holds.

We can summarize simply. Set a sensible course, reconsider regularly, and correct as necessary. Do these things, and we are on our way to being among the happy few when it comes to handling our wealth well.