Building an Investment Strategy is Not Hard

To win in chess, have a strategy. To succeed in retirement, have a strategy

In his Harvard Business Review article, “Five Questions to Build a Strategy”, Roger L. Martin says, “People make strategy much harder than it needs to be.” He then goes on to say, “My preferred approach is to treat strategy- making as developing a set of answers to five interlinked questions. The questions — which cascade logically from the first to the last — are as follows:”. Rather than use his language, I want to help my reader by giving the questions in a less business or organizational focus. The helpful questions, adapted from Martin’s article are:

  1. What is your objective and what are the goals you will use to measure your progress?
  2. Given the types of investments easily available to me, where will I choose to invest and not invest?
  3. What rules will I establish for myself regarding how I buy investments, sell investments, and reinvest dividends?
  4. What do I need to learn to build and maintain growth to achieve the objective and hit the goals?
  5. What tasks are necessary to build and maintain the strategy I selected?

The Goals to Consider

With these questions in mind, there is another set of questions that might help you prepare to answer those questions. If you are retired, you are probably going to be more limited in the choices you can make. However, if you are retired, perhaps rethinking your strategy is even more important than you think. Regardless, you should think about picking a strategy that meets some basic requirements.

  1. INCOME – Most retirees need income. Therefore, your strategy should provide sufficient income to meet your basic needs. Of course, this might vary depending on your non-investment sources of income like Social Security, part time work, or a pension.
  2. PRESERVATION – Most retirees don’t want to run out of income before they run out of life.
  3. GROWTH – Because inflation is inevitable over the long haul, income growth is a vital piece of the investing puzzle.

The Wayne Strategy Answers

To help you see that this is not terribly complicated, let me share my answers to the first five questions that keep the goals in mind.

Are your objectives smart? Specific, Measurable, Achievable, Realistic and Timely?
  1. What is your objective and what are the goals you will use to measure your progress? The objective is to have growing dividend income so that the RMD (Required Minimum Distribution) withdrawals from my IRA can be done without having to sell the positions that are providing the dividends. In my traditional IRA, my first RMD will probably be about $65,000. Therefore, using EAI (Estimated Annual Income) provided by Fidelity Investments on the Portfolio Positions Page (Dividend View), I can see that the EAI far exceeds my requirement. My goal was to move from growth-focused investments to dividend-focused investments with the exception of positions used for covered call options trading.
Types of Investments are driven by the strategy.
  • Given the types of investments easily available to me, where will I choose to invest and not invest? This is easy. I will avoid bonds and cash-focused investments like CD’s. Rather, I will primarily consider ETFs and stocks that pay a dividend proven to grow over time. Exceptions will include investments in BDCs and REITs to gain monthly dividend income.
Will you follow rules?
  • What rules will I establish for myself regarding how I buy investments, sell investments, and reinvest dividends? Given my strategy, it makes little sense to sell a dividend growth investment. However, if a company cuts or suspends a dividend, I won’t be bashful about selling it (with some rare exceptions, like Ford). How I buy investments is defined to include a rational dividend payout ratio supported by growing revenue and growing profits. The rules for buying investments apply to dividend reinvestment. I do not automatically reinvest dividends, as I want to choose the price I will pay for each investment and not be tied to the current market price for any investment.
Learning is not optional.
  • What do I need to learn to build and maintain growth to achieve the objective and hit the goals? I need to continue to learn about the businesses and ETFs that are available to investors. I also need to continue to learn about investing. The best places I have found to do that are Seeking Alpha and AAII.
Tasks take you to the goal set by your strategy.
  • What tasks are necessary to build and maintain the strategy I selected? Thankfully, the tasks are quite simple. I only have to monitor the quarterly and annual dividend behavior of my investments. Seeking Alpha makes this easy by sending me emails about all of my positions. The email messages tell me about dividend announcements, dividend increases, and other dividend news, both good and sometimes bad. I also need to decide to either spend the dividend, give it away, or reinvest it for even more dividend growth.

Summary

If you don’t have a strategy and are just doing “investing stuff”, you have noise that will often lead to defeat. If you have a strategy and don’t use it, don’t count on victory.

Sun Tsu – Strategy and Tactics

Helpful SEEKING ALPHA Link

HBR Link