Personal Investment Philosophy

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Every investor should have a personal investment philosophy. An investment philosophy is simply a set of principles and rules that will guide your actions when making portfolio decisions at both the macro and micro levels.

Pete Carroll, NFL Seattle Seahawks head coach, often asks his audiences and clients, “Can you describe your philosophy in 25 words or less?” Carroll believes that it’s the process of actually thinking it through and developing a philosophy that makes a difference. And, those who can effectively communicate their philosophy have a leg up.

An investment philosophy, in simple terms, is nothing more than how you view the world of investing. To some, they believe they can beat the market. To others, they believe in a longer-term approach and controlling what is possible to control. And, developing an investment philosophy is very important for setting yourself up for success.

Every investor should also be able to explain their investment philosophy. And, if you’re not able to explain your philosophy in a 60-second elevator pitch, chances are you haven’t developed a concise and truly viable philosophy.

A personal investment philosophy guides your investment decisions

An investment philosophy is simply a set of principles and rules that will guide your actions when making portfolio decisions at both the macro and micro levels. Essentially, an investment philosophy should be the starting point for every other portfolio-related decision you make as an investor.

With an abundance of research, data and opinions at our fingertips in today’s fast-paced world, it’s easy to patch together the best tactics, strategies or securities to buy right now. At best, this is a patchwork system that is sure to fail over the long term. Without an overarching philosophy to bring it all together, you’ll just be chasing one hot stock or investment fad to the next, losing money along the way. It may seem like a minor distinction, but an investment philosophy must be determined before a portfolio strategy can be implemented.

There is no such thing as a perfect portfolio, a foolproof system, a best-in-class asset allocation, just the right amount of risk to take, or a perfect time to buy and sell.

There are no investment strategies or rules that work at all times. There isn’t a single variable that can tell you when the coast is clear or when it’s time to start worrying. Your unique situation and personality type should dictate your philosophy. No style will work for everyone.

Rollercoaster of emotions of the retail investor.

One of the reasons personality is such an important aspect is because there will inevitably be periods when it seems like your philosophy doesn’t work anymore. There are many different ways to make money in the markets, but not all of them are suitable for certain personality types.

“If you avoid the losers, the winners will take care of themselves.”

One of the benefits of defining an investment philosophy is the ability to understand what to avoid—what doesn’t work in general or just what doesn’t work for you. Knowing what to avoid, or negative knowledge, is one of the best ways to figure out what works as an investor. Furthermore, understanding the relationship between risk and reward is a key piece in building your personal investment philosophy.

“Beat the market” strategies almost always fail

Regardless of the strategy you implement, the true tests of your beliefs will always come at those times when it’s not working. These are the times when your investment philosophy should help. Investor and author Rick Ferri summed this up nicely when he said, “Philosophy is universal; strategy is personal; and discipline is required. Philosophy acts as the glue that holds everything together. Philosophy first, strategy second and discipline third. These are the keys to successful investing.”

Without an underlying philosophy, it’s nearly impossible to implement an investment strategy because philosophy is what holds it all together when things aren’t working. The discipline that Ferri describes is always going to be the most important aspect of this equation. A philosophy can’t just be words. You have to actually follow through with it. Words can be hollow without the corresponding actions.

The philosophy should be there to guide your behavior. It should help you avoid crippling mistakes at the worst times. And it should help make some of the more difficult decisions that we’re forced to make as an investor less stressful.

A personal investment philosophy can help organize your beliefs, reduce the number of choices you are forced to make and avoid huge mistakes in the decision-making process.

10 Questions That Will Help Define Your Investing PhilosophyThe following questions can help you sort through the noise and create a personalized investing philosophy:

  1. What are your core investment beliefs?
  2. Do you understand your philosophy and why you believe in it?
  3. Do you know the potential risks?
  4. Does it suit your personality and individual circumstances?
  5. Will your philosophy help you follow whatever strategy you implement?
  6. What constraints are necessary for turning your philosophy into a portfolio?
  7. What will you own and why will you own it?
  8. What will cause you to buy or sell?
  9. What will cause you to make changes to your portfolio over time?
  10. What types of investments or strategies will you avoid?

References:

  1. https://www.aaii.com/journal/article/defining-your-investment-philosophy?via=emailsignup-readmore
  2. https://mlrwm.com/defining_your_personal_investment_philosophy/
  3. https://www.firstrepublic.com/articles-insights/life-money/grow-your-wealth/whats-your-personal-investment-philosophy-achieving-long-term-goals-requires-a-personal-roadmap
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