When the market gives you the slip, how should you react?
If you want to make a success of investing, you need a strategy. You also need some pretty canny tactics. But what's the difference between the two, and what happens if they go horribly wrong?
Right now, I'm in the process of finding out.
Strategic assets
My dictionary defines strategy as "the art or science of the planning and conduct of a war; generalship", which is taking things a bit far. I'm running a stocks and shares portfolio, not fighting a war.
The more peaceful definition is "a particular long-term plan for success", which sounds about right. Everybody should have a strategy, and here's mine.
Time is on my side
I'm investing for retirement, which at the age of 44, is more than 20 years away. As a self-employed journalist, I don't have a company pension scheme. Instead, I'm investing in a portfolio of direct equities, partly because it interests me, and partly because I want to avoid the high charges on actively managed unit trusts. I also have an iShares ETF FTSE 100 tracker, and some legacy unit trusts.
With time on my side, and markets a long way off their peaks, I feel able to have a relatively high risk portfolio. I don't expect to start swapping shares for bonds for another 10 to 15 years.
And I'm investing in equities because I still believe that in the longer run, they will outperform cash.
Top tips and tactics
My strategy hasn't changed for some years (it is, after all, a "long-term plan") but my tactics have. My dictionary defines tactics as "any mode of procedure for gaining advantage or success", and as you can imagine, that is changing all the time.
Last year, I was looking for stocks that have taken a hammering in the October 2008 crash, and would benefit from the market rebound. That worked a treat until the market slide this May.
After that, I shifted my tactics. I've shifting into blue-chips with high dividends, such as Aviva (LSE: AV), Diageo (LSE: DGE), GlaxoSmithKline (LSE: GSK), Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD). So far, it's been working pretty well.
In recent weeks, I've developed a more precise tactic. And this one might have been too clever for my own good.
Timing isn't on my side
During the August turbulence, I became increasingly bearish. I became convinced that the FTSE 100 would fall back below 5,000. Last time that happened, when the FTSE 100 fell 1,000 points, I missed a great buying opportunity. I wasn't going to make the same mistake again.
So when the market dipped to 5,150 towards the end of August, I held off, convinced it would shortly breach 5,000, and keep falling. Instead, it has shot up a few hundred points.
Tactical nous
I'm sure you can spot the underlying reason my tactics backfired -- I was trying to time the market.
So what do you do when your tactics backfire? It will happen to all of us at some point, so here are four general rules.
1. Don't panic.
Don't do anything too hasty. Tune out the noise, or you miss the big picture. I expect volatility to continue. That's why I plan to buy on the dips not the rallies.
2. Go back to basics
Was your strategy that bad? Is this just a temporary reverse, or something more fundamental? My tactical mistake was to pin my hopes on the stock market breaching a randomly-chosen threshold.
3. Trust your tactics
Refine your plans if necessary, but don't simply abandon them. Markets are in an emotional state right now, and you could argue they overreacted to last week's (not particularly) positive figures. They could equally likely to overreact to the next piece of bad news.
4. Remember why you chose your tactics in the first place
In my case, it was to avoid throwing money into a rising market. I need to remember that now more than ever.
Stand by your mandate
You should review your own strategy and tactics regularly, to make sure they meet current conditions, and your own view of where markets are heading.
Despite last week's short-term reversal, I'm standing by my tactics. After all, they were designed to last for more than just one week! There will be plenty more buying opportunities to come.
More from Harvey Jones:
> Harvey Jones has an interest in Aviva, Diageo, Glaxo, Lloyds, RBS, Shell and Vodafone.
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