Want to Succeed at Investing? You Need an Investment Philosophy
“The most important thing about an investment philosophy is that you have one.”
I love this quote by David Booth, Co-Founder and executive chairman for Dimensional Fund Advisors (DFA), and often reference it with my clients. It’s simple, to the point, and completely spot on in its conviction.
I get to speak with a lot of people about investing and I’ve come to an unfortunate conclusion: most people think about investing their money all wrong. This way of thinking usually ends up being very costly, overly risky, and can be financially devastating.
DON’T JUST TALK THE TALK
During my conversations I hear a lot about the following: hot new products, forecasts, beating benchmarks, manager track record, what to buy/when to buy it, what to sell/when to sell it, recent performance, which Wall Street expert was most convincing on CNBC this morning, how’s my neighbor doing…etc.
Well, I think that’s all pretty much garbage.
Instead, I agree with David that it’s about having an investment philosophy. What do I mean by that? I mean adhering to a few basic principles when investing your money and sticking by those principles through the good times and more importantly, the challenging ones when it’s most tempting to bail.
DEVELOP YOUR INVESTMENT PHILOSOPHY
We have an investment philosophy at Mountain River Financial and it centers on the following:
#1. EMBRACE MARKETS, NOT PREDICTIONS
We embrace an indexing-like style and own pretty much all of the publicly traded stocks and bonds instead of trying to identify mispriced ones. This means never making the mistake of paying for investment advice or management that centers on predicting/forecasting the future. Studies show that it can’t be done successfully over long time frames (which is what matters when you have decades to invest).
As such, it will most likely end up being an expensive waste of your time. This applies to actively managed mutual funds, hedge funds, tactical money managers, and any financial advisors whose advice involves their, or someone of their choosing, attempting to time the market or pick stocks.
Successfully and consistently predicting the future is at the core of what each of these groups are trying to do. We don’t believe anyone can do that and we avoid investment approaches built on such a premise.
#2. PURSUE DIVERSIFICATION
Instead, we do the opposite and doggedly pursue diversification. Along with time, diversification is an investor’s best friend because it reduces unnecessary risk. This is true within stock, bond, and real estate portfolios. It’s true across geographic markets and different asset classes. It’s true when leveraging different account types and tax-sheltered vehicles. And it’s true for the types of risks we intentionally seek out.
#3. TAKE MEASURED RISKS
There can be no positive return without risk, but not all risks generate a positive return. Our goal when investing isn’t to avoid risk but rather to seek out the right kinds of risk. We believe the right risks are the ones that academic science has identified and shown to generate excess returns over time. The academics call these “risk factors” and they are the sources of risk we target at Mountain River Financial. In turn, we avoid those risks that science tells us do not reward investors for taking.
#4. STAY THE COURSE
Control the things we can control. Specifically, when constructing client portfolios we focus on minimizing costs and maximizing tax efficiency. Once invested, we help clients recognize and manage the emotional responses that come with investing.
Every long-term investing experience brings with it good times, bad times, and dull times. It’s tempting to take on more risk during the good times, to de-risk in the bad times, and to try something new during the dull ones. Feeling these emotional responses is natural, but acting on them is the enemy of a successful investment experience.
IF IT ISN’T BROKEN, DON’T FIX IT
We adhere to this investment philosophy for the simple fact that it’s rooted in common sense and supported by decades of research. So, do you have an investment philosophy?
If you’re interested in learning more, please get in touch.