What is Institutional Investing for Individual Investors?
Many institutional investors, like pension plans, seem to endure and survive through all types of investment markets. In contrast, many individual investor’s portfolios are devastated by similar investment environments. Interesting. If an individual investor’s retirement income objectives look similar to an institutional investor’s Pension Plan obligations, then shouldn’t an individuals investment portfolio resemble an institutional investment portfolio? They should because an individual investor’s retirement investment portfolio can be and ought to be thought of as a de-facto personal pension plan.
Individual investors simply have to mimic a pension plan. The primary objective ought to be to get into the same asset allocation ballpark as the average pension plan. The Pension Investment Association of Canada (PIAC) is a good proxy for the average.
For the individual investor, mimicking a pension plan is easier today given the availability of index funds and Exchange Traded Funds (ETFs) which offer exposure to (nearly) all asset classes, regions, currencies and sectors. The result can be a low-cost, broadly and globally diversified investment portfolio that looks like a personalized pension plan.
What are the Big 5?
By far the most important things any individual investor can do are:
- Have a plan (call it an investment policy). This will help avoid knee-jerk buying or selling.
- If you do nothing else, get your asset allocation (approximately) right. As a start, mimic a pension plan’s asset allocation.
- Dollar-cost-average. It’s forced savings that uses market volatility to the investors advantage.
- Re-invest income, dividends and rent. Make the math and time work for you. Compounding is King (or Queen).
- Re-balance. Make volatility work for you. Buy low and sell high before regression to the mean.
Doug Cronk CFA is a Pension Investment and Risk Management Officer(“You know, there are some experiences in life you will never forget. This will not be one of them.”)