5 Things About Prudent Investing

1. Being prudent means being risk-aware, not risk-averse

Clients’ capital is precious. The permanent loss of capital is the biggest risk to investors. Markets fluctuate and cautiously navigating storms gives you a greater chance to still be afloat when it abates. That’s why a prudent investor focuses on growing real capital through a market cycle, not on taking outsized risks to maximize short-term returns.

2. Being prudent means remaining disciplined in the face of euphoria

Investors are human and humans are emotional, so overexcitement can occur. When investment euphoria occurs in the face of cheap funding, a growing global economy or stable geopolitics, markets can get “frothy”. However, froth eventually fades, and a prudent investor remains prepared to seize opportunities when they arise.

3. Being prudent means controlling what you can 

Accurately predicting the economic cycle and what it means for asset prices on a continual basis is extremely difficult. Prudent investors understand this, so aim to control only what they can – what goes into their portfolio and the price they pay for these assets.

4. Being prudent means learning from the past

Admitting mistakes is hard, learning from them is easy. A prudent investor puts capital to work cautiously, so high valuations raise alarm bells. Sometimes, hindsight shows that a thesis was flawed. When that happens, it’s time to admit the mistake and make it right as quickly as possible.

5. Being prudent means actively pursuing opportunities

Stillness does not imply inactivity. While a prudent investor may be defensively positioned in the face of market risks or elevated valuations, it does not mean they are sitting still. Preserving capital in liquid, high-quality fixed income allows the prudent investor to generate a return and move quickly into equity when risks dissipate, or valuations change.

Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile.

In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio’s value may decline during rising rates.

The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. No forecasts can be guaranteed. Past performance is no guarantee of future results.