Do you have an investment philosophy?
There are many good ones, but no such thing as a "best" one.
Many people invest based on rhetoric, stories, or simply emotional reactions. This often leads to bad outcomes and it’s why so many people do so poorly when they invest.
You need a few things set right in your mind before you should consider investing:
- A solid financial plan.
- A sound investment strategy.
- There’s a third part: You also have to understand what you believe in, as well. An investment philosophy derives itself from your “beliefs” about investing.
That said, despite what any financial advisor, book, or talking head might say there is no perfect investment philosophy. In fact, if someone says their plan is “the best,” your Spidey sense should immediately go off.
Here’s our one-page house philosophy (© Michael A. Dubis Financial Planning LLC):
Our investment approach is based on the following key tenets:
- We begin by understanding your unique purpose, values, and goals. This drives the plan.
- We only invest because we believe the world wants to be in a better place five-, 10-, and 20-plus years from now and are willing to get there. Your optimism is absolutely necessary for long-term investing.
- We believe investing is an art and science. The science is based on evidence-based investing (EBI). EBI is a reasonable approach that combines the data from the past and present with sensible guidelines about the unknowable future.
- We also can’t ignore unquantifiable behavioral influences or qualitative goals that can guide your decisions. We attempt to build a portfolio that blends this art and science to your unique situation so you will stick to it during good and bad times.
- We do not offer “outperformance” or entertain “performance chasing” since it’s distracting, intellectually dishonest, impossible to promise, and leads to poor choices. We offer a process of structure and discipline sensibly controlling for the things we believe can be controlled for.
- We do not believe in market timing or individual stock picking. Rather, we believe in global diversification of asset classes and strategies. Capital markets are global and EBI supports global diversification.
- We are long-term focused. Short-term cash flow needs should be identified in advance and set aside. The portfolio can then be allowed to work through five- or 10-year market-cycles.
- We consider tax placement of investments in an attempt to improve after-tax returns.
- We consider costs and attempt to optimize portfolio costs.
- We rebalance sensibly by allowing for wide bandwidths around target allocation to consider reasonable time frames, cash deposits, cash needs, taxes, market momentum, and transaction costs.
- We are grateful to serve you and take it seriously. There is no magic or perfect plan but there are sensible plans, which can be designed for you.
Is my approach “the best”?
I don’t know. That’s the honest answer.
I simply believe in it because it is sensible, low-cost, tax considerate, and has historically been reasonable in its results. Of course, it has its own risks just like anything else — as all disclaimers say, “Past is no predictor of the future,” etc., etc. They say that for very good reason. We won’t likely know for decades who is “best,” and then from that point forward we still won’t be able to rely on the past to tell us the “next best” from there. Process should drive actions rather than past outcomes.
Again, the point is there are many decent philosophies. Find one that makes sense to you. That’s your best philosophy.
So remember, if someone tells you their philosophy is “the best,” be careful! They’re either full it, delusional, misinformed, inexperienced, or a combination of some if not all of the above. None of which is good. Intellectual honesty should be the cornerstone of any investment philosophy.
Finally, house philosophies can change over time. You should be willing to change when either your situation or the facts change. Markets are not a hard science; rather they’re a social science, so you need to be flexible to this evolution.
Get your philosophy figured out first, make sure you can stick with it, and then you’ll be ready to execute!
MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He also previously served as part-time lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at firstname.lastname@example.org.
Disclaimers: This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s.
Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.
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