For this week’s post we are going to talk about investment philosophy and how this differs from investment strategy.
An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. When we put our investment philosophy into practice, it becomes our investment strategy. The philosophy is what we believe about how the markets behave and operate and, the strategy is how we implement that into an investment portfolio.
At The CM Group, we are deeply rooted in an evidence-based investment strategy, focusing on asset allocation and proper diversification. At the core of our investment philosophy, you’ll find these principles:
Markets Are Efficient and Work over Time
The market is an effective, information-processing machine. Millions of participants buy and sell securities in the world markets every day, and the real-time information they bring helps set prices. Given all Information, a stock’s current price reflects aggregate expectations about risk and return. The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
Active Investing Underperforms over the Long Term
The market's pricing power works against managers who try to outsmart other participants through stock picking or market timing.
Successful Investing Results from a Long-Term Disciplined Approach
Successful investing is best achieved over the long term by implementing a clearly defined investment strategy and concentrating on reaching your personal investment goals, not beating the benchmarks.
Fear and Greed Degrade Portfolio Returns
Research indicates that humans are not naturally wired for prudent, long-term investing due to a variety of behavioral biases. In our view, however, knowledge and discipline can help investors control their instincts for a better investment outcome.
Costs Make a Difference
Minimizing fees can have a major positive impact on the long-term returns in your investment portfolio.
Portfolio Diversification Reduces Risk
Successful investing means not only capturing risks that generates expected returns but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on "information" from rating services.
When working with individuals on their investments, we want to know what is important to them that requires planning, money and time. This framework helps us to better understand their belief system and to form custom investment strategies that encompass these beliefs. A person without an investment philosophy risks jumping from one strategy to another strategy and changing the portfolio too frequently, which results in paying more in trading costs, maybe paying more in taxes, without actually advancing investment progress. They may end up with a strategy that may not be appropriate given their objectives, risk aversion and, personal characteristics. They may even find themselves with a portfolio that underperforms the market.
“The most important thing about an investment philosophy is that you have one you can stick with.”
-David Booth, Founder of Dimensional Fund Advisors.
Happy investing!
The CM Group