Change Your Investment Strategy or Stay the Course?

8 min read8 min

22/08/26

Changed goals, horizons, liquidity needs or risk capacity justify a structured review.

A proposal stage does not make the decision for you. It simply makes the decision visible before it changes the portfolio.

First establish what has changed

State the trigger in one sentence without naming the action you already want to take. Not: "I want to reduce my equity allocation." Instead: "I expect to need part of the portfolio five years earlier than planned." The second statement can be tested. The first is already an order in disguise.

Weak triggers for changing strategy

These observations may prompt a review, but they do not by themselves justify a new strategy:

• The market has risen or fallen sharply.
• One asset class has recently outperformed another by a wide margin.
• A new forecast sounds especially persuasive.
• A friend, financial influencer or product provider follows a different approach.
• The portfolio feels uncomfortable at the moment.
• Your strategy looks dull beside the most recent winning strategy.

The discomfort is real. It is not yet evidence that the original decision was wrong. Often it describes the very risk that the strategy contained from the start.

Structural triggers that justify a review

A fresh review is more clearly warranted when a load-bearing premise has changed:

• The purpose of the money has changed.
• The time horizon has become materially shorter or longer.
• A new liquidity need has arisen.
• Income, job security or the emergency reserve has changed.
• Family circumstances, residence, tax position or legal constraints are different.
• The possible loss now exceeds your financial capacity to bear it.
• An explicitly documented premise of the strategy no longer holds.
• The existing strategy did not fit your goals and risk capacity when it was adopted.

Even such a trigger is not an automatic instruction to trade. It justifies a review. The result may be a new strategy, a smaller adjustment or a deliberate confirmation of the existing plan.

Risk capacity and risk tolerance are not the same

Risk tolerance describes how much volatility you are psychologically willing to endure. Risk capacity describes how much loss your financial circumstances can actually absorb without putting important goals at risk.

The two may diverge. Someone may watch price swings calmly but need the money in three years. Another person may have a long horizon and stable income but lose sleep after a 20% decline. In the first case, financial capacity limits risk. In the second, a strategy may be unsuitable if it is unlikely to survive realistic stress.

A market fall does not automatically alter either measure. It may, however, reveal that you previously overestimated your tolerance. The question is then not, "How do I avoid the next fall?" It is, "What long-term allocation can I afford financially and am I reasonably likely to maintain during a bad market?"

Five questions before any strategy change

1. Which premise has changed?

Name the specific premise in the existing plan and the new information. The more precise the answer, the easier it will be to review later. "The world has become more uncertain" is not a testable premise. "I now plan to retire five years earlier" is.

2. Would I propose the same change if I could not see recent returns?

This question is a simple test for performance chasing. If the idea loses its appeal without the past few months or years, it is probably driven more by prices than by goals and constraints.

The test does not prove that the change is wrong. It only shows which information is carrying most of the weight.

3. Is this a strategy change or ordinary rebalancing?

Rebalancing restores an existing target allocation. A strategy change alters the target allocation or the rules themselves.

An investor who brings a 70/30 portfolio back to 70/30 after an equity rally is following the plan. One who permanently reduces the equity share from 70% to 40% is changing the plan. Either decision may be reasonable, but each needs a different justification.

4. What will implementation cost?

Visible costs include trading fees, bid-ask spreads and possible tax on realised gains. Less visible costs include weaker diversification, new product charges, additional maintenance and the risk of rebuilding the portfolio yet again later.

Do not compare the new strategy only with an idealised outcome. Compare it with the existing strategy after all costs and with realistic disadvantages included.

5. What observation would change my view later?

A decision is more robust when it states the conditions for a later review. Record the premise you are making today, when it will be reviewed and which new information would matter.

Without those criteria, every subsequent market movement may reopen the entire argument. With them, repeated tinkering becomes a documented process.

What the research shows, and what it does not

Barber and Odean studied 66,465 US households from 1991 to 1996. The households that traded most earned an average 11.4% a year after costs, while the market returned 17.9% over the same period. The study shows a historical association between high activity and weaker net returns. It does not prove that every trade or every strategy change is wrong.

Morningstar compared time-weighted US fund returns with estimated investor, or dollar-weighted, returns for the ten years to the end of 2024. Investors earned an average 7.0% a year against 8.2% for the funds, a gap of 1.2 percentage points. The estimate approximates the experience of the average dollar in the pool of assets, not that of a particular person. Planned contributions and withdrawals also affect the figure, so not every measured gap is a behavioural error.

The defensible conclusion is narrower: repeatedly reacting to past returns can create costs and encourage poor timing. Whether a specific change makes sense still depends on goals, horizon, liquidity, risk capacity, premises and implementation costs.

A practical process for strategy changes

A simple process is enough if it is followed consistently:

1. Write down the proposal. What should change, and what specific trigger sits behind it?
2. Create distance. Apply a cooling-off period to unplanned ideas. An urgent liquidity need is different from market pressure and needs its own review.
3. Compare the premises. What assumption held before, and what new information calls it into question?
4. Classify the decision. Is this a decision to do nothing, to rebalance or to change the target allocation and rules?
5. Quantify the consequences. Include fees, spreads, tax, product charges, diversification and maintenance.
6. Confirm deliberately. Until confirmation, the existing strategy remains in force. Afterwards, give the new version a date and a short rationale.
7. Set the next review. Record a date and criteria instead of reopening the decision with every headline.

The value of this process is not that it prevents change. It prevents a change from happening without first being recognised and justified.

Staying the course is not always the right answer

"Stay the course" is a useful counterweight to action bias, but it is not a substitute for thought. A stale plan does not become suitable because you follow it with exceptional discipline.

If the money is needed sooner, the emergency reserve is missing, an important new goal appears or the potential loss is no longer financially bearable, doing nothing may be the riskier decision. A strategy also deserves an honest correction if it was chosen because of an earlier fashion, an unrealistic return assumption or without reference to your life.

The right discipline therefore requires two abilities: protecting a sound plan from market noise, and changing it when its premises genuinely no longer hold.