There are many who would suggest that, in a digitally-wired world in which information travels at light speed to all corners, the investment playing field has been leveled between individual investors and the institutions. In reality, however, the incessant noise and information overload can do more to fuel the irrational behavior of investors than it can to provide any sort of advantage. Absent a principled investment philosophy that guides their decisions and keeps them focused on their own investment objectives, investors are more likely to succumb to the mentality of the herd which can take them over a cliff.
The same can be said for new, tech-driven investment models which can create an over-reliance on lab-generated portfolios that can lull investors into a blinding complacency. The problem with many investment models that hypothesize future returns is that they tend to be based on risk calculations that imply knowledge of future uncertainties, which is impossible. They also assume that people, as a whole, will act rationally, which has been disproven time after time. Investors, who are grounded by a foundational investment philosophy, don’t have to rely on flawed investment models or the rationality of other investors.
Successful, long-term investors recognize that media noise only impacts short-term outcomes and investment models don’t reflect real world realities; which why they stay laser-focused on their investment philosophy. The world’s most successful investor, Warren Buffet, can ignore the noise and crystal balls because he knows they don’t matter. In building one of the most successful investment portfolios of all time, he has strictly adhered to his own investment philosophy:
“Buy wonderful businesses at a fair price with the intention of holding them forever.”
As you can see, an investment philosophy doesn't have to be intricate or involved. In fact, conciseness is an indication of stronger conviction.
Your Investment Philosophy Guides Your Strategy
Your investment philosophy forms the outer structure of your investment strategy, which should include your clearly defined objectives and the specific practices to be employed. The following philosophy statement clearly encapsulates a long term strategy:
Diversify broadly, stay invested, re-balance annually, minimize investment expenses; rinse, repeat.
All that’s needed is the specific practices or methods for creating a diversified portfolio and rebalancing it as needed to keep it aligned with one’s objectives and risk profile. The part about staying invested could be a little more difficult because that typically requires discipline and patience, which tends to elude many investors. However, having a well-conceived investment philosophy can keep you focused on what’s important and eliminate second-guessing.
In developing your investment philosophy, it would be important to have some insight into some of the more enduring investment principles and practices. With your financial future at stake, it would be well worth your while to read up on some of the most lucid economists, such as Eugene Fama and David Booth, both of whom practice strict abidance to their philosophies. More importantly, you need to have a clear understanding of your own objectives and core beliefs about money and risk in order to have the strongest conviction in your investment philosophy.
It would also be important to work with an experienced investment advisor who shares your core values and beliefs about investing. Ideally, your advisor’s own investment philosophy (be leery of advisors who don’t have one), is compatible with yours.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.