What to learn from institutional investors
In cooking, you have amateur cooks who follow recipes online and starred chefs who juggle advanced techniques and the universal references of the prince of gastronomy, Curnonsky. What if the same applied to investing, and individuals could borrow a few tricks from institutional investors, the “starred chefs” of the markets? It’s possible. For this, there’s no need for a chef’s hat or a degree in finance, just a good dose of curiosity and common sense, while avoiding unfortunate improvisations that literally ruin the result!*
Unlike individual investors, an institutional investor is a professional who expertly manages different strategies to maximize investment growth while minimizing the risks they are willing to take. Their playground? The financial markets, where they rigorously and methodically manage billions in line with the various components of their investment strategy. Unlike the individual investor, who invests for their future or that of their family, the institutional investor acts on behalf of a multitude of clients or shareholders.
Just as a starred chef relies on an expert team and quality equipment, the institutional investor relies on massive resources (data analysis, advanced technological tools, armies of analysts, …), as well as a set of fundamental principles akin to a prudent family head. They particularly rely on a long-term vision that allows them to keep a cool head and invest for the long term, rather than getting burned by overly risky investments that ultimately lead to financial loss. They know that, just like in cooking, diversification is important. A single ingredient has never made a healthy and balanced recipe conducive to the good health of their investment portfolio.
It is understood, you probably do not have the same resources as a well-rated Norwegian sovereign fund, but nothing prevents you from drawing inspiration from the best practices applied by the best on your scale. Here are some of the main ingredients of their success.
The ingredients of success
While there may be many potential ingredients to consider, three of them deserve to be particularly highlighted as they will significantly determine the evolution of your investment portfolio when it is faced with the turbulence that regularly shakes financial markets.
Planting only tomatoes is risky: a cold snap and it’s a disaster. The same goes for investment.
Let’s stick with the culinary metaphor and imagine you’re a gardener. Planting only tomatoes is risky: a cold snap and it’s a disaster. The same goes for investment. Institutional investors systematically diversify their portfolios to reduce risks: stocks, bonds, real estate, derivatives, gold… You too should think about spreading your investments across different asset classes and regions. Even if you have in-depth knowledge of a particular field, strictly adhere to this principle of diversification. In investing, you must be wary of what seems too familiar to you.
Institutional investors do not check their portfolios every 5 minutes (and you should do the same), but they invest with a long-term vision to serve clearly defined objectives. You too should think about your life goals and adopt a long-term vision for your investments: a house, retirement, children’s education. Invest according to these goals and do not let your emotions dictate your decisions.
Take a moment, at least once a year, to check if your investments still align with your situation and goals.
3. Regularly review your strategy
Institutional investors adjust their portfolios based on market conditions and their objectives. You too should turn to your banker to discuss your investments. Take a moment, at least once a year, to check if your investments still align with your situation and goals. You may also opt for discretionary management, meaning you give your bank a mandate to manage your assets on your behalf, respecting the investment strategy previously defined with you.
By applying these institutional principles (diversification, long-term vision, regular review), you can manage your investments more wisely. And if you aspire to become a more informed investor, educate yourself rather than diving in headfirst! You need to know what you want and what you can do before investing.
So, ready to put on the apron? The financial markets are waiting for you. And remember, the recipe for successful investing is ultimately very simple: maximize diversification, long-term and discipline while minimizing costs and avoiding being driven by our emotions. Keep in mind that, as humans, we are all regularly irrational. This awareness will allow you to make informed choices without falling into the traps of the markets or your own cognitive biases. As in cooking, the best results come with patience, method, and a pinch of creativity!
* Content translated from French by the BIL GPT AI tool
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