Having an investment philosophy isn’t something that individual investors think about much, or at least they don’t realize they think about much. An investment philosophy consists of the core principles that should govern an individual’s or organization’s investment activities. Without these principles, a strategy or portfolio will likely lack the necessary sustainability and organization to endure the ups and downs of market cycles. Investment philosophies usually consist of principles such as diversification, active versus passive, re-balancing, risk management, etc…
My personal investment philosophy is centered on the importance of risk management. Through my professional experiences, I’ve gained a very healthy appreciation and respect for risk from when I was part of a team working with the creditors in the Enron bankruptcy to my time in the trenches on Wall Street during the financial crisis. I have first hand exposure to the dangers of concentrated investments, human bias and emotion as well as the general uncertainty of global economies, governments and markets. Understanding the risks we face and how to properly manage them is paramount to investing success. However, many of us focus on the risks we don’t have a lot of control over (economies, governments, etc…) when in fact the most important risk we all face and need to learn to manage is our own biases and emotions.
Risk management can appear complicated and perhaps alchemical to many who don’t have experience with it, but it really isn’t. We all manage risk every day whether we have auto, renters or homeowners insurance or we hedge in any number of life situations where we want to protect an interest or an outcome. All of these activities are elements of managing risk.
My methods for managing risk aren’t magical or widely unknown. As a matter of fact, you’re probably familiar with all of them. The key is that they’re part of an overall process to which I strictly adhere. Discipline and consistency are absolutely necessary.
In order to combat the most prevalent risks, having a long-term perspective, strictly following rules-based investment strategies and diversifying well will get you to where you want and most likely need to be. There’s nothing sexy or mysterious about any of these principles. Discussing them won’t lead to you being the most popular person at a social function. However, they will protect you from your biggest risk, your personal biases and emotions, and will help you weather the inevitable ups and downs of business and market cycles by keeping you invested, compounding returns and making meaningful progress towards your objectives.
The final principle of my investment philosophy is low fees. Again, nothing new or innovative. Just a time-tested and proven principle. The lower your fees the more of your money keeps working for you by growing and compounding over time. Make sure you’re fully aware of what you’re paying for your adviser and any investment products you may be using.
Having a sound investment philosophy is obviously important. Actually following and sticking with the philosophy is even more important.
Do you know what your investment philosophy is?