Winnings are in the Strategy

Just as in a game of chess, even the best tactics can't win you the game if you don't have a proper strategy in place. Strategy is about setting up long-term goals and objectives. It involves understanding what you want to do and why you want to do it.
Tactics are about how you achieve them.

The right tactics can bring big gains, but to really achieve financial success, think strategically.

"Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat."
Sun Tzu

When visiting a financial planner, we most often want to know how our resources are going to be directed; what the planner is actually going to do, day to day, in order to generate a positive outcome.

Of course any prudent investor needs to be aware of the workings of their finances, however, tactics mean very little if they are not part of a bigger strategic plan. Outside the context of a strategy, they are risky, work in isolation and don't build on each other's success, in pursuit of a strong financial goal.

Hence we may begin our journey with specific tactical moves, maybe buy some shares or a managed investment. But if we haven't clearly set out our financial goals first, and formulated a strategy to help us get there, then we're not necessarily going to be heading out on our intended path.

"If one does not know to which port is sailing, no wind is favourable."
Seneca

Before enlisting any tactics, the first step of any financial journey should be about identifying exactly what we are trying to achieve. From there blossoms a strategy - which is a long-term plan of action designed to achieve a particular result. Devising a strategy that's in line with our goals is a river that must be crossed before we can enlist the help of tactical measures.

Much of the financial advice we receive is tactical. We are advised on what type of funds we should invest in, what we must include in our portfolios, and which shares to purchase. In essence, this type of advice tells us where we should be placing our resources. It doesn't explain why we do the things we do. And without a clearly defined purpose, and the strategic plan that goes with it, we're floating without any specific direction.

?Why? comes before ?how?

We often put a great deal of effort into selecting the means through which our resources will be utilised, but a lot of us don't spend enough time examining the strategic vision and philosophy, which is driving the application of the tactics. Many people are simply satisfied with being told how things will be done, when in fact what they should be asking is why it is being done.

Talking about ?why? we are doing something is just as important as talking about ?how? it is going to be delivered. Unfortunately it is a conversation that isn't always conducted, or sometimes conducted too late. We often wait until there is a problem or a failure before asking ?why did we do it that way?? rather than asking these questions at the outset.

The point is, any good planner will spend time to define their client's main goals. Be it a five, 10 or 20 year goal that we are working towards, identifying the chief purpose of our financial plan is the starting point. Maybe it's your children's education or early retirement - regardless of what your priorities are, they need to be clarified in drawing up a strategy for wealth creation and management. Call it your master plan, one that is tailored to your hopes, dreams and ambitions.

Executing tactics without the proper strategy often leads to frustration and disappointment. Results are not often consistent and financial movements come in peaks and troughs. The nature of the market assures that it is always going to be risky and will inevitably go up and down; but having a strong strategic approach can help to minimise that risk and ensure a greater chance of success.

"He who has a strong enough why can bear almost any how."
Friedrich Nietzsche

However, it's important not to lose sight of the purpose. Hence, strategy must come first in order to make sure that our actions fit into our overall goals. Tactics cannot save a poor strategy in a game of chess anymore that it can redeem a poorly orchestrated financial plan.

Tactics are one part of a bigger strategic plan. Outside the context of a strategy, they are risky and work in isolation. Ideally we want each tactic we enlist to work in tune with our strategy.

Seeing the forest for the trees

Each of us has a vast array of investment choices before us, and we often look for instruction on how to navigate these options. Whether it is a residential property, a direct share, an IPO or some form of managed investment, the options can appear endless. We can find ourselves unable to see the forest for the trees. Suffering from analysis paralysis, we spend so much time analysing, debating and discussing our options that we lose our focus.

So don't lose sight of the big picture while you are focusing on the minute detail. The key to getting it right is to remove yourself from the forest and think strategically first before even considering any form of tactic.

For example, rather than getting caught up in the allure of the number and the return figure, it's important to think strategically about what tactics are going to help us achieve our goals. In real terms, a strategy of low risk, low return, but with a large capital base, would fit our goals (we'll speak about the benefits of this specific strategy in a later post).

Thinking strategically means that the more money we have, the lower the return we need to make a large absolute gain. In addition, when we do get better than average returns, we get this on a far larger piece of money resulting in a far larger potential upside, every year that we hold this capital. One of the main methods of increasing your capital base, is to simply borrow the funds. Making debt work for you means having to think strategically about its balance with your assets and acknowledging its critical role in wealth creation.

Strategy and tactic are inextricably linked. But their relationship must be understood by the investor and applied appropriately in order for their effects to be fully realised. A holistic approach where our tactics are driven by strategy is ultimately going to make them - and us - more successful.