10 April 2015

Tactical and Strategic Investing: Part II of IV

In Part I, I explained how to think about “Strategic Investing” – specifically, where you want to be financially in the next 10-40 years from the back end – backwards planning that is.  If you answered with anything but “rich”, well, you probably need to go see a psychiatrist.

In any case, now that you’ve thought about that, the next question is: “How do you get there?”  The answer is:  from the front end, a little bit at a time!  Investing for the long term means you have to start saving a little at a time in the short term. In other words, in order to successfully invest “strategically”, you need to invest “tactically”.  Let’s think of it like this - strategic investing, or investing for the long term, is actually a whole bunch of smaller tactical investments that achieve your strategic investment over time.  

What many investors, especially new investors, fail to realize is that tactical investing does not always result in a tactical win. It takes continued application of the tactical battles, or tactical investing in this case, to reach the goal of the strategic plan.  Over time, continued tactical investing leads to many smaller wins and a few losses that, when combined, result in an overall strategic win consisting of hundreds of thousands or even millions of dollars stashed away for retirement.
So, let’s discuss the one thing that discourages most investors: how do you deal with “tactical” losses?

If you think of a tactical investment as a series of battles or engagements, with a series of different tactics all being used both together and separately, you’ll start to understand. One loss in the tactical world is not the end of your strategic war.  It might be a setback or even a loss, but when you look at all the wins, the one or two losses ultimately add up to nothing.

Additionally, a tactical investment loss isn’t always a loss.  Think of an investment as a member of a platoon.  Think of your company as being several platoons, and several companies are part of a battalion, and several battalions are part of a division.  What you wind up with is many platoons, or investments, spread out across a large number of battlefields.  Not every battle is going to be won, but if you keep putting more resources (money) into the division (multiple battalions, companies, and platoons) eventually, the tide will turn and you’ll start having win after win after win, with only the occasional loss.  Over time, your wins will thoroughly overwhelm any losses you may have, and you’ll have a complete and total victory.  

I’m going to cover how to diversify or spread out your investments more in Part III, but the key point to understand is not to let a few losses discourage you.  Instead, redouble your efforts, focus on putting more resources into those tactical investments that you know you are winning or can win.  
If you have an investment that isn’t doing so well, try to figure out if you’re just not giving it enough resources.  

If it’s just a bad investment and no amount of money will make it work, then you have two choices -  either leave what you’ve put into it and don’t add more to it (rather, take that money and put it somewhere else), or declare it a complete loss and pull all your money out of it for use elsewhere.  I’m not a fan of the latter choice because unless the investment goes completely belly up, it will usually start to recover at some point and gain ground.

In Part III, I’ll go over how to spread your investments out, or diversify, for tactical and strategic gains!

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