Yoshikami: Learn From Netflix Volatilty
Founder and Chairman of the DWM Investment Committee at Destination Wealth Management.
Time horizon can be very confusing when determining investment strategy and decisions.
Understanding one's philosophy is most critical, particularly when attempting to avoid emotional reactions.
Just look at Netflix; a disaster a year ago and suddenly now a roaring success. How do you make sense of these types of stories? Time and price is the key.
Long vs. Short
The long-term time horizon matters. The longer the time horizon, the better probability one has that an investment thesis will play out. This timeframe applies not only for individual selections but also for overall allocation and sector decisions. A longer time frame filters out the noise and emotion of the short-term.
But, one cannot ignore short-term news and movements in the market. For this reason, shorter term inputs matter. Look at Dow; the company missed earnings but is that likely a long term view? Or is it perhaps a shorter term headwind facing the company? You need to make that determination.
But remember, shorter term tactical adjustments for many institutional managers are more about shifts rather than a drastic repositioning; adjustments tend to be incremental.
(Read More: Netflix's 'House of Cards' Binge Strategy)
Buy Price, Target Price, and Reassessment Price
You need to determine what a correct buy price for you might be for any give asset. For most investors it is some percentage of believed intrinsic value. Asset tend to be discounted when there is belief that the market has misunderstood the business prospects for the position.
Your target price is that point which you believe a position is near fair value. Don't try to capture full valuation to full valuation; it is important not to try to grab the last dollar up, but instead do your best to capture profit when it is available. It's best to not be greedy when implementing an investment strategy.
Additionally, examine positions if they reach a certain point up or down. This re-examination price is an important discipline process and helps avoid falling in love with a position (see my previous post)
If a position hits your re-examination price on the upside, take time to analyze the current strength of the position and whether your target price is correct. Confirm if your thinking is still in line with previous conclusions.
(Read More: Why BlackBerry Is Failing)
If the position drops in price to a certain point (perhaps 25% below purchase price), make a reassessment to analyze if your original thesis was correct. Don't just hope everything will turn our fine; review and re-examine.
Watch all of positions on an ongoing basis and not just when they hit certain prices. But if the reassessment price is hit, it should trigger a dedicated review of your thinking in order to make sure that your original thesis still makes sense. The same applies to sector and allocation decisions. Watch and review consistently.
Bottom line is this; watch not only your portfolio strategy but the price movements of individual positions within that strategy. Be longer-term focused when it comes to valuation, but we do pay attention to short-term price movements and current news. Be both fundamental and tactical.
(Read More: Why the Wealthiest Benefit Most From Dow 14,000)
Michael Yoshikami, Ph.D., CFP, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010, 2011 and 2012.