Why are adjustments to my strategy needed?

Main takeaways

• Like an autopilot in a plane or car, a good investment strategy also makes slight corrections on its long journey.
• There are 2 kinds of “course corrections” usually happening: a) to keep your portfolio in line with your needs, b) to reduce risks.
• Selma does these corrections automatically. Doing it yourself would require a lot of work.
  

In the article “Why do I need a tailored investment solution?” you learned the importance of having an investment solution that fits your needs. It is mentioned there that “everything flows”, i.e. a good investment strategy has to adapt to changing circumstances. Here you get to know a more in-depth explanation of what is meant by that.

Generally, there are two reasons for “course corrections.” You can split up the first reason into subcategories: 

1. to keep your portfolio in line with your needs
   - after market movements
   - as you get closer to retirement
   - after changes in your life circumstances
2. to reduce risks.

Correcting market movements

Financial markets consist of a very diverse set of instruments, each playing a different tone and rhythm. Company shares move fast and tend to have the highest long-run returns. On the opposite end of the grading scale, there are loans to highly-rated countries, which have lower long-run returns, but move more steadily. 

Hence, it comes naturally that each investment’s weight in the portfolio changes all the time. Once it goes too much off course (from what constitutes a good strategy for your needs), a correction is needed to bring them in line again. This is called rebalancing. ⚖️

Once your portfolio is well spread across asset classes and regions, the task of rebalancing becomes quite difficult for a human being. Consider calculating the deviations of each of your, let’s say, 10 ETFs in your portfolio, and then finding the right amount of trades to bring those in line again who deviated, without creating new deviations in the other ETFs!  This is a task we’d like to leave to a clever trading algorithm. It can monitor these things on a daily basis, and trade only when certain criteria are met. This can save costs and let the portfolio run smoother.

Getting closer to retirement

When you start to approach retirement age (let’s say 5-10 years before), a less risky investment mix probably makes sense. Here’s why:

When you retire, you start to live from your lifetime savings, including your investments. You will probably start to withdraw money from your investment account to pay for your living expenses. That makes it impossible to let the money recover from setbacks. You basically “lock in” losses (at least partially) if and when they occur.

Hence, it would be wiser to shift the investment strategy away from growth and towards stability, the closer you get to your retirement age. That reduces the risk (and size) of potential losses.

Adjusting to changes in your life

Furthermore, the shape of your personal wealth may change, and this may change your ability to take on risks. Usually, as you get older (or let’s rather say, wiser), you tend to own more stuff (cars, houses, art works). This can be considered being part of your total wealth, like your investments.

For instance, if you sit on a collection of works from Banksy, you would probably be able to take on a bit more risk when investing. Of course, Selma would only include a part of this less “liquid” wealth in its calculations. When you come to think of it, the art works may also lose value, or you may not be willing to let go of them in order to finance your living expenses. 😊

Reducing risks

Finally, Selma offers two other features, addressing some issues with financial markets: A well-known “anomaly” of financial markets is that, over the long term, more cheaply valued companies tend to perform better than more expensively valued companies. Selma considers this “value factor” in your investment strategy by giving higher weights to investments that appear to be more inexpensive, and vice versa.

Another feature of Selma is the precious metal part of your portfolio. Gold and silver have often served as a good protection against general market downturns. The COVID crisis of early 2020 and the war in Ukraine in early 2022 have been recent examples. 

It should be noted that financial markets tend to be rather expensively valued before the outbreak of such crises. Thus, Selma takes it one step further and combines the precious metals with the value approach: when markets for company shares are generally rather expensive, Selma increases the share of precious metals in your portfolio automatically.

Conclusion

Many of the needs for adjustments that we have outlined here can be anticipated and planned. That is why we believe it is so much more efficient to leave these tasks to an algorithm that can monitor your portfolio on a daily basis. 

Changes in your life circumstances are obviously harder to anticipate. Thus, it is also important to keep your investor profile up to date, so that the algorithm can also include this information in its planning.