In this era of data, I guess, all of us will agree that having a data driven, well-defined, and disciplined approach helps achieve goals. This works for dieting, fitness, managing a company, as well as managing investments.
3-M framework for managing investments is about Measuring, Monitoring, & Managing.
Measure: Identify a benchmark for performance review
Investing could have various goals like wealth increase or wealth preservation. By identifying a benchmark one is creating a reference for investment performance. This helps one track performance of an investment vs the goal.
For each investment, one should identify a benchmark so that one is able to compare investment performance against the benchmark.
- For stock purchase one can have the stock market index as the benchmark. Here the expectation is that the stock returns should beat index returns over a period of time.
- For purchasing gold, one can have an inflation rate as the index. Here the expectation is that gold returns should beat inflation.
- For purchasing a house, one could have “Residex” an index published by National housing board as the reference. Here the expectation is that house value should increase in line with the value of houses in that geography.
One can even have multiple benchmarks for a given investment.
Ensuring that the identified benchmark is relevant for an investment is important. For instance one should not chose bank rate as a reference for investments in gold, as gold is an inflation hedge and may not generate returns that a deposit in a bank does.
Monitor: Identify review frequency
While making an investment one should determine the frequency at which one will review the investment performance. One should have a frequency that is reasonable for that asset class. Reviewing too frequently might add to the stress and lead to knee jerk reactions, while reviewing too infrequently might lead to poor performance.
There is no right number for all investments but one should be identify a frequency based on the asset class as well as individual bandwidth to collect required data for the review. We suggest that one should do it at least once a year.
It is important to identify the frequency upfront and adhere to it – else lethargy as well as inherent tendency to avoid looking at poor performance will lead to festering of poor performance.
Manage: Identify steps to be taken
At the time of making investments one should identify the steps one will take based on the anticipated performance. This will help avoid post facto justification for inaction. For instance, one can resolve to sell an investment if it does not beat the benchmark over a 3 year period.
Key for the manage leg of the framework is to identify actions upfront and execute, as long as the initial assumptions made while identifying the actions continue to be valid.
Frameworks can assist in having a structured approach. Success in investing, like in any other field, is based on the discipline and execution abilities of the investment manager.