Baseball managers don’t tell their batters to swing for the fence on each pitch. Instead, they protect the plate and hit what they can in order to get on base.
An investment philosophy has a set of principles and guidelines that determines which pitches you swing for and which you don’t. It provides direction and perspective for the decisions you should and shouldn’t make with your investments.
An investment philosophy (also called investment strategy) is a set of guiding principles that shape and inform an individual’s, an advisor’s, or an advisory firm’s investment decision-making process. While an IPS can be thought of as a map, your investment philosophy is a code of conduct that defines how your money will be managed. It is the star by which you steer – the approach you take when it comes to managing your money.
Do You Have an Investment Policy?
Your investment philosophy determines how you behave as an investor. There’s an old adage: “If you don’t stand for something, you’ll fall for anything.” Without a clear belief system to govern how you invest, you risk falling into the other pitfalls on this list.
When I speak to investors who are frustrated or confused about their portfolio – or are having a hard time understanding the big picture – I often find that they (or their advisor) either don’t have an investment philosophy, or are failing to adhere to it. They claim that their approach to investing is to buy “good deals.”
This does not constitute an investment philosophy, and such behaviour will more often than not lead to chaotic, random, and risky portfolio construction. A solid investment philosophy can help you build a sound foundation for future success in the market.
My book, The Empowered Investor, highlights eight key principles that, when implemented together, form a powerful and all-encompassing investment philosophy.