For the month of June, the editorial team is focusing on portfolio strategy and context. In the coming weeks, we’ll get into how authors can discuss particular strategies, but first I’d like to kick off the discussion with how an investor’s circumstances affect strategic decisions. I believe authors who are more transparent about the factors motivating their decision-making process have stronger connections with their readers that facilitate audience growth and long-term success.
Let’s go through a list, adapted from the CFA Institute’s Level 3 curriculum, of the factors affecting individual investors’ decisions, with brief comments about their relevance to Seeking Alpha authors and readers.
Investor characteristics: What are the individual characteristics that make you unique as a person and as an investor?
Personality: What’s your investor personality type? Are you cautious, methodical, spontaneous, individualist? How do you gather and evaluate information? What is your level of interest in and energy for individual security analysis? How do you assess, interpret, and cope with risk?
Goals: What are your investment goals? What are your future needs, and how do you expect to meet them?
Source of wealth: Where does your wealth come from? Are you entrepreneurial? Did you inherit your wealth? Are you a wage-earner? How stable has your income been so far in your career?
Measure of wealth: How rich are you relative to your expected consumption? Greater incremental wealth relative to spending facilitates risk taking. How much risk can you afford to take?
Stage of life (accumulation, maintenance, distribution): Are you a millennial, a gen-Xer, or a boomer? Though everyone’s different, all else equal, your stage of life affects risk tolerance on both psychological and strategic levels.
Investment policies: CFA Institute recommends that investment professionals create investment policy statements for any client. Such statements commit professionals and clients to a particular and transparent strategy that’s tied to an individual’s circumstances. This is also a helpful exercise for any investor. Seeking Alpha authors can help their readers understand their decisions by having a clear and well-defined investment policy.
Return objective: What’s your personal discount rate/required annualized return? How much money do you have now, and how much do you want to have at the end of your time horizon? How are you going to get there? The search for a 5% annual return requires a very different decision process from the search for a 10% annual return.
Risk objective: How able are you to take risk? How willing are you to take risk? What’s your honest assessment of your ability to stick to a strategy through return shortfalls and portfolio drawdowns? This should have a substantial impact on your decisions.
Constraints: You’re a human being with particular needs. These needs constrain your portfolio decision process.
Liquidity - What is the size and timing of major cash flow needs? Are you going to buy a home? Send kids to college? Care for a loved one? You’ll need cash to finance these items.
Transaction costs - These are usually low for public securities, but other components of a portfolio such as private debt and equity and real estate can carry substantial transaction costs. How do those portfolio components affect your investment decisions?
Price volatility - I had the down payment for my house in a diversified equity mutual fund. The 10% drawdown in January 2016 made the risk I was taking salient, and I had to take a small loss to ensure I’d have sufficient capital to meet my goal of a home purchase. How does price volatility affect your investment process?
Time horizon - The longer you can, the more chances you have for investment returns to revert to the mean (if you believe in mean reversion of investment returns). Short-term dislocations can create opportunities, but you need to be able to wait them out to profit from them.
Taxes - U.S. tax incentives related to mortgage interest, college and retirement saving, and other things are often tacit factors in our investment decision processes. How do taxes affect your portfolio strategy?
Many of our authors do a great job making connections between their circumstances and their portfolio strategies. Several that spring immediately to mind: William Koldus, George Schneider, Dividend Sleuth, Chris DeMuth, Richard Berger, Regarded Solutions, Alpha Company, Jeff Miller, RoseNose. I don’t think it’s a coincidence that these authors have some of the best engagement stats of anyone writing for Seeking Alpha.
I’m encouraging my team to engage with authors when they mention these elements of their investment philosophies and processes. When we heighten transparency around the factors affecting decisions, readers can better evaluate how the analysis at hand aligns with their own investment processes. The result is deeper engagement and impact per article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.