I’ve always had a fascination with the word why. Like most people, I started asking why around the age of 3. Unlike most people, I never stopped! I think my natural inclination toward curiosity is one reason I love this business as much as I do. I find the whys of people’s lives to be absolutely fascinating. When helping guide families along the path toward their financial goals, one learns a lot about their whys. Here are some questions that often provide insight to some of our client’s whys: “Why are you investing, how do you decide where to invest your money, how do you know when to make a change, and do you have an overarching philosophy that guides your investment actions?”
The last questions is often the most important one. You see, philosophies are the principles and values that provide the foundation for an individual’s system of management - investment management in this case. Philosophies provide easy to understand guidelines that define the mission. Simple enough to be remembered and referenced at all times, yet important enough to establish the investor’s priorities. Philosophies guide the development of investment policies and procedures. They provide a reference point for making decisions. And most important, they provide a go to anchor when things get rough – market corrections, increased volatility, international upheaval, flash crashes, and recessions.
Unfortunately most investors and even most advisors don’t have a clearly defined set of investment philosophies. Which means they are starting the process backwards or maybe even in the middle. But, I know what you are thinking. Who wants to sit down and thoughtfully create a set of philosophies? It reminds me of the times I participated in vision and mission creating exercises! But, to do the job right, we had to start with these exercises so we could provide structure to move everyone toward a common business goal. The motivation behind developing investment philosophies is to provide structure to move everyone (you, your spouse and your advisors) toward your family’s personal goals.
Here is one example of a set of investment philosophies:
- Investment strategies should be tied to specific goals, and they should provide a reasonable probability of achieving those goals.
- Investment strategies should be reasonably compensated for the risk being taken, and the investor should be comfortable with that risk.
- Investment strategies should be structured to avoid placing the investor in a position of potentially avoidable catastrophic risk.
This is the set of investment philosophies that we use as a starting point in our firm. By referring to these philosophies, an investor and their advisor can create a set of policies and procedures to guide the creation, monitoring, evaluation and modification of all of their investment activities. If you do not have a set of investment philosophies, I would encourage you to develop one. If you are working with a financial planner or an investment advisor, ask them what their investment philosophies are. See if they are consistent with your beliefs. If they don’t have any philosophies, you might want to work with them to develop a set that is tailored to your beliefs.
Although important, finding the best investment and insurance products isn’t the most important determinant of positive long term financial outcomes. Most people make the best progress toward their goals because of the philosophies, policies and procedures they put in place. The planning. The discipline. There are a lot of things to consider. Make sure you spend time focusing on the main things!
Shouldn’t formal Investment Philosophies be part of your Second Half Strategy?
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Second Half Strategies, a registered investment advisor and separate entity from LPL Financial.