Chapter 6: Advanced Investment Planning
Getting left in the dust
If you're not continuously learning and adapting to new market conditions, you'll likely be outpaced by those who do. For example, the average P/E (price-to-earnings) ratio has been trending upwards over time. If you're stuck in the mindset that a P/E ratio of 15 is too high, you'd find it difficult to invest in much of anything today.
Additionally, the factors that drive market outperformance are always evolving, and the valuation ratios that worked for older companies might become outdated for newer ones. Staying flexible and open to new information is key to staying competitive in the ever-changing market landscape.
Trying to adopt every change
At the same time that you can get left in the dust by not adapting, you could also be at the other extreme, trying to adapt too much and move toward the future too quickly.
If you do this, the risk is that you change your strategy too much, which can compromise your long-term thinking. So, once again, the best approach is to find a compromise. How do you strike that balance?
Compromising
Finding this compromise is one of the more challenging aspects of your investing journey. We believe the best approach is to lean towards inactivity and resist the urge to change your strategy too often, as this is generally better for long-term success. However, when you do need to adjust your strategy, you should do so thoughtfully.
A good strategy for knowing when to update your investment philosophy is to keep track of the average ratios for the index you’re investing in. For instance, if you're investing in U.S. stocks, monitor the average ratios for the NASDAQ 100 and the S&P 500. Usually, your core strategy won't need to change much, but continuing to learn about what drives value and which factors influence stock prices while incorporating this knowledge into your strategy, will make a difference.