Why You Need An Investment Policy

by Amyr Rocha Lima, CFP®

Several companies have been making headlines recently for their surging stock prices. A few of the companies in question are BlackBerry, AMC, and, especially, GameStop. The incredible volatility in the price of these stocks has caused some investors to make lots of money, while others are losing at an equally impressive rate.

During times like these, it can be incredibly tempting to deviate from your investment strategy in hopes of scoring big. That’s why, as a financial planner, it is more critical than ever to establish an Investment Policy with your clients that works for all parties.

What’s going on with GameStop?

If you haven’t been following the story, the stock of GameStop has been surging at unprecedented levels in recent weeks. In early January 2021, the stock shot from $17 to over $300 in a few weeks, which is a jump of about 1,914%. This is quite a run for a brick-and-mortar gaming company that is mainly viewed by most as an outdated (and failing) business. So, what’s going on then?

Essentially, what’s playing out with GameStop’s stock is a battle between “bulls” and “bears”. Bulls are investors who believe that a stock’s price will go up (and they buy more in anticipation) and bears are those who believe the price will drop (and they sell shares that they have borrowed).

These two parties have been going at it both trying to outdo each other. The bulls are rushing to buy and hold GameStop in hopes that the price goes up and bears are rushing to sell their borrowed shares in hopes that it goes down. The high trading volume leads to an incredibly volatile stock price, which means lots of money won and lost.

How to navigate these waters

One of the main reasons that The GameStop saga has made headlines is because retail investors (those with just a few thousand pounds) have been making lots of money. This encourages other “average investors” to jump in and risk their savings in search of big gains.

The temptation of quick cash is one that can lure in even the most diligent investors. One of the longest-held mentalities of investing in the stock market is that you need to be patient and ignore the day-to-day fluctuations of the market. However, that gets harder to do when the day-to-day fluctuations of a single stock are 50%+ for a few days straight.

During times like this, it is definitely easy to get caught up in the frenzy and that’s why it’s more important than ever to establish an Investment Policy Statement with your clients. This statement will act as your roadmap to help you and your client navigate through new waters. That doesn’t mean that you can’t ever take risks, you just need to be sure that risks are part of your client’s overall financial plan.

A few things that an Investment Policy Statement will highlight are:

  • Investor’s goals – This allows you to know exactly what they are hoping to get out of their professional relationship with you.
  • Investor’s time horizon – This lets you know if your client will have the time to recover any potential losses.
  • Asset class preferences – This gives you an opportunity to educate your client about the assets that would best support their financial plan.

Trends like GameStop, although they can be fun and interesting, can also be a detriment to investors who get caught up in the media frenzy and end up investing (and losing) more than they can afford.

Interested in knowing more about our investment approach?

If so, here’s what I’d like to offer you: a (virtual) cup of coffee and a second opinion.

By appointment, I would be delighted to have a chat with you about your situation. I will ask you to briefly outline your financial goals – in other words, what you hope your investment portfolio will do for you. Then, I’ll review your strategy with you.

Interested? Feel free to contact me here.

Amyr Rocha Lima, CFP® is a partner at Holland Hahn & Wills LLP, a financial planning practice based in Kingston upon Thames. He specialises in working with successful professionals age 50+ helping them reduce taxes, invest smarter and retire on their terms.
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