5 Ways to Stick to Your Investment Process

By Clare Flynn Levy

There is nothing familiar about the situation we’re in today. So it’s easy – almost automatic, in fact – for us to assume that our familiar modes of behavior no longer apply.

But as investors, we know that uncertain and turbulent times are precisely when it’s most important to observe – and adhere to – our established investment process.

Our role at Essentia is to help fund managers cut through the noise generated by everything from internal biases to exogenous events so they can clearly assess their situation and stay aligned with their own best practices as defined in their investment process.

The noise in the system today is deafening. But it’s not impossible to mute. Every investor is unique and every process is different, but it’s worth considering some best practices that make it easier to stay focused on your own process when there’s blood on the screen:

1. Document your process: Create a process checklist for each type of investment in your portfolio — and use it. As anyone who has read Atul Gawande’s The Checklist Manifesto is aware, checklists are well-proven to reduce error, especially in high-pressure situations. There are lots of software tools on the market that can help: Tallyfy, Evernote, and Trello, to name a few. Of course, creating a checklist and getting in the habit of using it are two different things. (At Essentia, we push the steps in an investment process checklist to the portfolio manager, so he or she doesn’t need to remember to use it.)

2. Keep your eye on the horizon: When considering scenarios, focus on your actual investment horizon. That should be obvious to any professional investor, but during a crisis, humans’ attention naturally snaps to the short term. If you’re investing on a 5-year view, it’s worth forcing yourself to lift your gaze: how do recent events potentially affect the value of your investments 5 years from now? Many investments look terrible during a crisis, but if their fundamentals haven’t changed, their long-term prospects may be as good – or even better – than ever.

3. Record the WHY: When you decide to act – or not to act – record the context in which you made the decision and the reasons that were foremost in making it. Ideally, do this in a structured way (eg, using multiple choice), so you can analyze the data later. At Essentia, we automate that process – and the insights that we then pull out of that data end up being very powerful. But just recording the rationale behind your actions – with whatever tools you have at your disposal – is helpful for ensuring your decisions are as deliberate as possible.

4. Nudge yourself: Pre-set notifications can give you a heads-up to revisit your conviction at critical points in an investment’s lifecycle: after a certain period of time, after the price has moved up (or down) by a certain percentage, or after a key metric has crossed a threshold. If, at that point, you wouldn’t still be buying the security, you might want to ask yourself whether you should be selling it. “Nudges” (as we call these notifications) are an important part of our offering at Essentia – they help clients behave more consistently, more deliberately, and more in line with their established investment process, especially when the going gets tough. But there’s no shortage of notification features in your own day-to-day software tools that are worth using – provided you can pinpoint what’s worth being notified about.

5. Prioritize the process: It might sound obvious, but the single most powerful thing you can do is keep your process top-of-mind and make a daily commitment to following it, in the knowledge that there are a million derailers out there. It helps a lot to carve out regular, focused time in your calendar that is dedicated to using or reviewing the process.

The underlying assumption here, of course, is that you have a process you believe is worth following. (If you’re not sure you do, we can help you think that through.) But assuming you do, anything you can do to reduce the cognitive energy you have to spend on remembering or administering your process will increase the probability that you’ll stick with it.