The lure of quick market gains and financial independence, many times from social media gurus driving luxury cars and traveling the world, tempts countless individuals to dive into financial markets. Often equipped with little more than mere intuition, tips from friends, or even investment advice from the same gurus that have lured them into the market, most are set up to fail.
Professional investors know something critical: consistency, discipline, and a structured approach over time outweighs instinct or sporadic luck. Investing can be as thrilling as it is intimidating, as lucrative as it is unrewarding. This is where a systematic investment approach becomes indispensable.
A systematic approach to investing involves creating a clear, robust, and rules-based strategy that dictates how investment decisions are made, executed, and evaluated. It can include asset allocation models, risk management protocols, rebalancing schedules, and decision-making algorithms. The goal of a rules-based approach is to remove randomness and subjectivity from the investment process. Rather than reacting emotionally to market swings or chasing the latest hot stock, a systematic investor follows a plan that is based on rules, data, logic, and long-term objectives.
A systematic approach also reduces the emotional burden that is a byproduct of putting one’s capital at risk. So called “investment gurus” often promote buying assets, yet they frequently omit how much risk is imbedded in owning those assets. When prices fall, fear takes over and when prices rally, fear of losing causes gains to be cut short. One of the hardest decisions to make is the decision to sell. Without a well-defined process, human nature will tell us we can recover the loss and should stay invested. Our ego makes it extremely difficult to accept when we are wrong. Poor decision making, based on emotions, leads us into panic selling and chasing rallies. A rules-based process helps navigate uncertainty and avoid emotional errors, making investing distinct from gambling.
Another reason for a systematic approach is consistent behavior. Investing without a framework will regularly lead to inconsistent and unpredictable behaviors. Without it, you will bounce from one theme to the next searching for that elusive home run. Without knowing why you entered a position, it becomes difficult to decide whether to keep it or exit it based on the most recent adverse headlines. Consistency, through a rules-based approach, allows one to measure and evaluate an approach. Being able to measure your investment decisions will allow you to identify what is working and what is not as well as the ability to adjust your system when needed based on facts and not on hunches.
As markets are inherently volatile, an additional benefit of a systematic approach is enhanced risk management. Typically, systematic strategies incorporate strict risk controls measures, such as appropriate position sizing relative to your capital, holding time frames, stop losses, and diversification. A good risk management structure will help protect your capital against adverse market moves and attune your plan to your goals and risk appetite. Rules based investors understand it is impossible to predict what will happen in the future. Even though volatility and other metrics can help us understand the level of risk of an investment, exogeneous events can exacerbate historical correlations disrupting one’s understanding of true risk, therefore limiting losses is as important as making profits.
Markets may change, but the principles of successful investing do not. A systematic approach will not guarantee profits or protect you from losses, but it will give you a framework to navigate uncertainty with discipline, clarity, and more importantly, peace of mind.
As someone who grew up swimming and playing soccer, I see the value of having a disciplined investment approach similar to the way athletes rely on training, repeated exercises, and game plans to succeed. Athletes understand difficult times will come. They know there will be periods where no improvement is made regardless of how disciplined they are, yet they stick to their process. They stay true to their plans and continue working towards their goals despite adversity. Athletes rely on their discipline when their mind tells them it is too cold out to go to practice or when their body still aches from their last training session. Talent in sports might help win a few games, but discipline wins championships. When things are rosy and the body feels good, it is easy to go to practice. Just like when the market has the longest bull run, investing is easy. However, investors, just like athletes, need a disciplined system to help them endure different market cycles and difficult times. This is particularly true today, as uncertainty and volatility has risen considerably, and a single post on social media can send markets flying or sinking in a day. In investing as in sports, having a good system is often better than a lucky hunch and good intentions.