prime quadrant investor mistakes
Reactionary Investing vs. Strategic Investing

Reactionary investing is common among many wealthy individuals. Over the course of several years, they will allocate money to investments which seem, at any given moment in time, attractive. Although people can do well investing in attractive opportunities as they arise, individuals who have the means to hire an advisor are better off investing strategically and creating a road-map before investing. Then, these investors can let the roadmap guide their investment process and avoid practicing reactionary investing.

Through strategic investing, individuals can set guidelines about asset allocation, risk tolerance, liquidity, tax efficiency and other criteria to make sure that each subsequent investment they make is part of their overall life planning.

The main problem with reactionary investing is that in its lack of process, the relationship between each investment is not sufficiently considered because each decision is made in isolation from the next. Investing in reaction to opportunities causes investors to very quickly lose sight of the forest for the trees.

An investment portfolio is much more than the sum of its individual parts. For example, the way in which investments interact (correlate) with one another is almost as important as the returns on the individual investments themselves.

Specifically, strategic investing can take into consideration investors’:
· Ability and willingness to take on risk.
· Return objectives, in light of personal, familial and philanthropic goals.
· Time horizon, as a result of age and the ages of successors.
· Tax consequences
· Legal restrictions.
· Liquidity and income requirements
· Unique circumstances, arising from the infinite characteristics which distinguish individuals from one another.

Unfortunately, many individuals and families do not consider all these issues before investing their money and their reactionary investing causes disappointing and frustrated results.

The Investment Policy Statement
Arguably the most important single document for wealthy families and their advisors is the investment policy statement (IPS), which should be completed prior to an asset allocation plan. The IPS is a document which outlines the client’s needs and the rules which govern the investment portfolio. It sets guidelines for a client’s asset allocation, liquidity and risk exposure. It also describes the process for updating these guidelines as clients’ personal circumstances change over time. It strives to bring to fruition the benefits of strategic investing.

A good IPS is not a luxury – it is a necessity. Clients need to formalize their risk-return objectives and investment professionals need to understand exactly where their clients are coming from.

Without having a detailed, practical and strategic discussion before investing, client and advisor may as well be tethered together in a forest without a map for their entire relationship.

The valuable information contained in the IPS should not be flushed out over the course of years. It needs to be discussed at the outset between client and advisor and used as the basis for asset allocation. Clients, for their part, should demand this service from their advisors. We call this “The Investment Constitution”.

Revamping a Reactionary Portfolio
It is never too late to start investing more strategically. Whether an investment portfolio needs to be merely tweaked or strategically reallocated in its entirety, improving investment strategy will always be helpful. In cases where a portfolio needs to be significantly reallocated, advisors and clients can work together to make the transition as undisruptive as possible.

Copyright © 2017 Prime Quadrant.
All rights reserved.