The 5 Ps of Rational Investing: What Matters Most
It’s hard to be rational when investing, ESPECIALLY when emotions seem to drive the markets. We’ve written about rational versus emotional investing in “The Game of the Stock Market vs. The Business of Investing” and “When Emotions Hijack Your Investment Returns,” but we have distilled those ideas into the Five P’s of Rational Investing. The interesting thing about market cycles isn’t just how they unfold—it’s also how investors respond to them.
By nature, investors become complacent when markets are strong and panic when markets take a downturn. Both responses undermine long-term success.
The best investors do something different. They maintain the same disciplines regardless of what markets are doing. They understand that successful investing isn’t about predicting the next move—it’s about consistently doing the work that matters.
Here are the 5 Ps of Rational Investing:
- Plan
- Policy
- Professional
- Philosophy
- Process
The first two—Plan and Policy—are focused on you; your goals, your preferences, and your situation.
Review Your Financial PLAN. When was the last time you looked at it? If you’re working with one of our Client Service Representatives on a comprehensive plan, schedule time to review it. If you don’t have a current plan, let’s create one. Your portfolio should be designed around your actual goals and timeline, not around changes in the market.
Your plan should adapt to changes as they occur in your life. Did you inherit some money, sell a business, retire early, have a change in health, promise to help a child with a down payment? All these things and more are used to update, review, and possibly change your plan.
Review Your Statement of Investment POLICY. While your plan answers “what do I want to accomplish,” your policy answers “what’s required of my investments to get there?” This is a clear, concise description of what you expect from your investment professional, which can help avoid emotional decisions when markets get scary—or exciting. Be clear about expected returns, prohibited investments, ability to take short-term losses for long-term gains, etc. Contact Client Services and schedule a time to review your policy and make necessary changes.
The next three work together to support you—a Professional with a Philosophy and Process that meets your needs and helps you sleep at night when things are uncertain.
We are Working for You
While you’re managing your part—keeping your plan current and communicating changes—we’re managing ours. As professionals, we are in the business of managing money.
We evaluate investment options based on business fundamentals and economic value. We monitor market cycles because we believe markets, sectors, and companies are cyclical. Technological, economic, monetary, social, and political forces all influence these cycles, and the life span of any cycle varies.
We have a sound philosophy that governs our investing—what we think works and why—and a process for applying that philosophy to generate the returns stipulated in your policy. We are your partner, guiding you through both calm and turbulent markets.
The Pattern That Separates Success from Mediocrity
Here’s what we’ve observed over decades: The investors who reach their goals aren’t the ones who panic the least during bad markets or who feel the most vindicated during good ones. They’re the ones who maintain the same disciplines regardless of what markets are doing.
They review their plans regularly—not because markets force them to, but because maintaining current information is part of the process. They communicate changes to their advisors promptly. They understand the difference between what they need and what recent performance delivered. They resist the urge to make emotional decisions based on short-term results.
This consistency matters more than any single investment decision. It matters more than market timing. It matters more than finding the “best” investment.
Here’s Your Invitation
Review your plan. Don’t have one? Let us help you create one. Give our Client Service team a call. Make sure we know about changes that affect your timeline or goals.
This discipline—the boring, unglamorous work of maintaining current plans and clear communication—matters far more than what markets do in any given quarter.
Markets are cyclical. Your discipline shouldn’t be.
The opinions expressed are those of Anthony Muhlenkamp and are not intended to forecast future events, guarantee future results, or offer investment advice. Investing involves risk. Principal loss is possible.
