An advisor without an investment philosophy is like a boat without a rudder.
If your advisor doesn’t have a convincing, evidence-based set of beliefs about the markets and how to invest in them, then you risk drifting from one idea to another.
An inconsistent investment approach is a common cause of capital loss.
An investment philosophy should inform an advisor’s decisions about your portfolio, so it’s important you not only understand and agree with their values and ideals, but that you can see evidence of a logical basis for making decisions about your wealth.
If your advisor recommends an investment strategy that doesn’t fit your values or view of the world – and that bothers you – then it’s not the right strategy for you.
My investment philosophy follows:
Markets are efficient; meaning all available information and opinions about a stock are factored into the price. There is no reliable way to predict the future or act on information before the rest of the market. It’s difficult to beat the market consistently and just as difficult to pick investment managers that can.
Instead of trying to beat the market, let the market work for you.
Risk Requires Reward
The greater the investment risk, the greater the expected return should be.
Not all investment delivers a return that justifies the risk involved. Both the risk and potential return of an investment should be taken into account and weighed against your objectives, risk tolerance and time frame.
Many investors and advisors make the mistake of exposing their capital to additional risk, when there is little additional expected return.
Costs and Fees Matter
There is not a positive correlation between the cost of an investment manager and the expected returns. When the costs of research, analysts and trading are taken into account, net returns usually decrease.
A highly diversified portfolio with low turnover tends to produce better returns.
Diversification is Essential
If you are not rewarded for investing in specific stocks over others, then the risk of a bad investment should be reduced through diversification. Investing in a small number of assets increases the risk of a negative return, without providing a reliable chance of a return above the market average.
Asset Allocation Affects Performance
Different asset types provide different returns and risks. Investing in an asset mix linked to your objectives, time frame and need for capital growth is the smartest way to invest. An appropriate asset allocation reduces volatility, which can also enhance your returns.
Investment Approach should be based on Evidence
Investment strategy should be based on science and independent academic research. Any strategy should be tested against new research and updated with the latest discoveries in market behaviour and economics.
An investment manager whose process is not transparent or logical should be avoided. A strategy that cannot be explained or is based on ‘gut feel’ is not acceptable.
Discipline is Crucial
Emotion, lack of insight, excessive risk taking and other common behavioural mistakes compromise returns and can devastate an investor’s net worth.
An advisor who ensures you understand your investment strategy, and helps you stick to it, is critical to success.
Simplicity Reduces Stress
A well-researched, evidence-based strategy allows you to block out the daily ‘noise’ so you can focus on your overall objectives. This approach is less stressful and consistently more successful.
Contact me to talk about how I would apply this philosophy to your situation.