Investment strategies

John Brennan and Rick Ciolino from Cape Ann Savings Bank talk with John Maher about investment strategies. They cover buy-and-hold, dollar-cost averaging, diversification, and other essential strategies for investors. Then, they explain why investors should take a disciplined approach rather than buying into the media's stories about the "monkey and the dartboard."

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Transcription Disclosure: Below is a transcript of the conversation between John Maher, John T. Brennan and Rick Ciolino. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I am John Maher, and I'm here today with John Brennan, Senior Vice President of Trust and Financial Services, and Rick Ciolino, Trust Investment Officer, at Cape Ann Savings Bank in Gloucester, Massachusetts. Today our topic is investment strategies. Welcome, John and Rick.

Rick Ciolino: Hi, John.

John Brennan: Hi, John.

Buy-and-Hold Investment Strategy

John Maher: Yeah, so Rick, we're going to kind of go through a little list here of different types of investment strategies, and why don't you take the first one, which is buy and hold. What is that strategy and what does that mean?

Rick Ciolino: Sure, I'd be happy to discuss this. If you've listened to any of our other recordings, we talk about investing in a stable, patient and disciplined way. Buy and hold is basically what it says, but there is a little bit more to it. But basically what you're trying to do is, instead of trying to buy and sell things continuously, you look for a company that you think has... or an investment, but we'll use stocks just for clarity here.

So you could say that there's a certain group of companies or a certain company that you really believe in, that's a really stable company that we think can grow over a long period of time. These are our favorite investments. You buy it and hopefully you can hold it and it will just continue to grow. If you have faith in the management, the management will continue to do well, continue to earn money for you.

And as the earnings ability grows for the corporation, typically the stock market will bring up the value of the company as well. So when we use a buy and hold strategy, which we often do, we will buy a group of securities with plans to not sell them. Of course, we do set in place parameters where we may need to sell because we may no longer have confidence in the future of the company, and at that point we would replace it. So there is potential for selling in a buy and hold strategy. It's just not the plan, or it's not the strategy.

John Maher: So the idea here is basically, don't just go by the whims of what's happening on a day-to-day or a month-by-month basis. If that stock starts to go down a little bit or dip down, you're not immediately saying, oh, sell that, and dump that, because chances are, like you said, over time, that's going to come back.

Rick Ciolino: Oh, sure. And that's a very important point that I missed. Often, investors overreact, and they look at the positives and they're leaving out the negatives, or they look at the negatives and leave out the positives. And often a company can trade in the short term on something that has nothing at all to do with the company, but just based on what's going on in the overall environment or the market. If you were to buy and sell based on those trends, it's a lot harder to earn a good return, a good solid, stable return over time, than just dealing with the day-to-day fluctuations and just realizing that with a focus on longer term that you're in a good investment that'll do well over time.

Dollar Cost Averaging

John Maher: Okay. Our next investment strategy is dollar cost averaging. What is that? Rick Ciolino: Dollar cost averaging is a good way to deal with the fluctuations in the market. And basically what you're doing is, you're putting a certain amount of money in over a period of time. So cost is basically thought of as what you're paying for a company or an investment.

So if you put a certain amount in, say every month, then you are averaging into the market based on whatever the market is doing. And you might be buying high one month, you might be buying low one month, but over time you have belief that you are averaging into a good security without being concerned about the day-to-day fluctuations.

John Maher: So this is sort of similar to the buy and hold strategy in a way, but in this case, you're not just reacting and saying, oh, well, the cost of that stock is really low today, so I'm going to buy now, and trying to guess when it's going to go up and try to buy when it's low and sell when it's high. That's not the strategy.

The strategy is just to put a certain amount into that stock or that mutual fund or whatever every month. And like you said, over time, it's going to average out so that sometimes you might be buying high and sometimes you might be buying low, but it's all going to sort of even out over time.

John Brennan: There's a theme there, and listening to some of our other podcasts, slow and steady wins the race with investing. Good investing is kind of boring, because it involves discipline and it involves tuning yourself out from the essentially emotional and the ups and downs of the stock market. You just want to stay out of that volatility. Your best investment moves are made quietly over time and in a disciplined fashion.

Portfolio Diversification

John Maher: All right. Our next investment strategy is portfolio diversification. So that kind of ties into what you were just saying. Tell me a little bit about portfolio diversification and what that is.

John Brennan: Well, diversification is what it sounds like. So our economy is broad. We have all kinds of businesses. We have biotech, we have automakers, we have agriculture. So if you're diversified, you want to be diversified across the economy, you want to have a little bit of everything, because that way if one sector is doing lousy, the other sector might be doing great.

So the idea of diversification is that you sort of try and match up these different sectors, okay, one that's going to do well in one set of economic circumstances and one that's going to do well in another set of economic circumstances. The idea is to level out some of those highs and lows, so you go for the broad middle, and a well disciplined, diversified portfolio captures upside, maybe not the top of the top, and maybe not the bottom of the bottom, but a good diversified portfolio should get to that solid middle, and the benefits of a growing economy.

Rick Ciolino: At a very basic level, if we knew all information on every company, we would say, okay. We would pick a stock. You might be very bullish on Tesla. All right, I want to invest in Tesla because I really think that that company's going to grow over time. Would you put all your money into that one stock and just expect it to grow? That adds an awful lot of risk and that adds an awful lot of volatility and keeps you up at night.

John Brennan: You're an Elon Musk tweet away from disaster.

Rick Ciolino: Exactly. Where diversification adds a whole new level of investment.

John Maher: Right. So if you wanted to invest in Tesla, fine, but invest in 20 other different things as well, so that if Tesla goes down, you're not putting all your eggs in one basket, like you said.

John Brennan: And going back to one of the other things we talked about, you could invest in a mutual fund that invests in electric vehicle makers. So you could invest in the sector, not just a single company. You could invest in something that invests in alternative fuels where it might capture some of these things. Or you might have a portfolio that focuses on innovation, okay. Ark Innovation, Cathie Wood, is a very good example. She's always investing on bleeding edge future companies, and sometimes she's well ahead of it and sometimes she's killing it.

Asset Allocation

John Maher: Our next topic is asset allocation. What is that?

Rick Ciolino: Asset allocation is a term that, it's the way we break up, the way we diversify assets. So basically an asset allocation at the very core, we would start with what our major investment groups are and how we would basically allocate them. So we may start with an investor who wants to keep a certain amount in cash or a cash alternative because they need liquidity or they may want liquidity at some point. And then you may say, okay, we can put some money into bonds for some income and stability, and then we may be able to put some money into stocks for some growth, and maybe some other asset categories such as commodities or real estate. But overall we're developing an asset allocation that all together will have some sort of a risk and return characteristic. So for a more conservative investor, we might have more in bonds with stability and income, more in cash for liquidity, and less in equities and less in alternative type assets.

For somebody who's younger, say for example, if we have somebody who has a good job, 401k, plenty of money for now, but wants money for the future, has some extra money to put away for the future, they're not looking to spend this money for a long time, but they're hoping to have a very prosperous retirement. And so for them, they might have an asset allocation that is very heavy towards the stock portion and they might have more invested into growing the portfolio. So we would consider that a growth portfolio and we would invest that with a more aggressive allocation.

Keys to Successful Investing

John Maher: Okay. And then John Brennan, finally, what are some of the keys to successful investing, in your opinion?

John Brennan: I think the key to successful investing is discipline, okay. Because one of the things that we've gone through in the past year is, we've gone through a market downturn. And so if you have a long-term investing strategy, and if you are dollar cost averaging into the market, that means you continue to buy shares while the prices are down, okay.

So what you want to do is, you don't want to be reactive. You don't want to react to news which affects the market. And it's not hard to see a correlation between the news cycle and the markets. The Fed announces something, the market reacts. There's a war in Ukraine, the market reacts. There's something like 9/11 that happens, the market reacts. What you have to do is, you have to really stick to your guns. You have to be able to withstand the ups and downs. You have to have an investment strategy that allows you to sleep at night, okay.

We tell customers that, but you have to be able to go in for the long haul, and sometimes you have to open your statement, see those investments are down, and just grit your teeth and say, well, I'm just going to wait this out. I'm going to ride this out. We had a lot of conversations in the past year where we really encouraged investors. We would say, look, do you need this money now? If you're saving for retirement, and even if you're 55 and you don't need the money for 10 years, you don't need the money now, now is not a good time to start changing your strategy. Now is not the time to sell because asset values are down. Just be disciplined, keep acting according to your plan, follow your investment policy statement and your strategy, and hold on.

Contact Us to Talk About Investment Strategies

John Maher: All right. That's good advice. John and Rick, thanks again for speaking with me today.

John Brennan: Thank you, John.

John Maher: And for more information, you can contact Cape Ann Savings, Trust and Financial Services at 978 283 7079 or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.