First things first, what’s an investment philosophy? What I mean by investment philosophy is this: where you believe investment returns come from, and the strategy you employ to capture those returns.
When you put money in your company 401k, or write a check to put some money away in your IRA, or make an electronic transfer within your investing app of choice, you should know how the money will be invested and why. You should even have an expectation for the amount of return you’ll earn on those investments long term. These things all play into your investment philosophy.
Here’s the thing, for most people I run into, when I mention their investment philosophy I get blank stares. Frighteningly, I sometimes even get those blank stares from other financial advisors. Since most people haven’t ever thought about their investment philosophy and they have no idea where to expect returns to come from, their investing strategy devolves into a fee game. Fees are easy to track, easy to understand, and they feel more like they’re in our control than the scary market with its ups and downs. So, find a fund with low fees, maybe a little diversification (whatever that means) and you’ll be all set. Advisors who don’t have an investment philosophy tend the same way, they pick out a couple of low fee funds because they ‘care about the customer’ and make an easy sale. Turns out low fees are easy to sell.
This is a problem. Low fees are not bad, but they’re distracting. Returns don’t come from low fees, and looking for funds with low fees does not count as an investment strategy. There are two significant problems if you play the low fee game:
- You’ll only invest in low fee funds. On the surface that doesn’t sound like a problem, but there’s a reason that some funds have low fees. US large companies (S&P 500) are among the easiest stocks to trade the world so the transaction fees are very low. That’s what low-cost funds are almost always made up of, S&P 500 index funds are incredibly cheap to own. Smaller and international companies are more expensive to trade because they simply require more work. However, over long periods of time, small and international asset classes outperform the large US asset class. Not only that, the small and international asset classes are essential to the structure of a balanced, diversified, efficient portfolio. If you’re in low fee funds only, you’re missing out on significant returns and reduced volatility, things that far outweigh their additional cost.
- You’ll be tempted to invest without an advisor because advisors charge fees. Today it’s easier than ever for individuals to invest on their own. Within a few taps on the screen in your pocket, you can be up and running in a super cheap large US index fund with no additional advisor fees. Again, that seems like a good thing on the surface, but data has overwhelmingly shown that investors do not match market returns, even the lower returns of the S&P 500, over time. A major reason for this is the lack of a disciplined advisor sticking to a good investment philosophy and coaching clients all along the way. It can be really tough to stick with the market during down years, especially when retirement is just around the corner and the media is freaking out and your friends are getting out. Our natural tendency is to bow out of the market during turbulence and wait until it seems safe again or retreat into something ‘guaranteed’ like a fixed annuity. That’s exactly what we do, routinely. A good advisor thwarts all the fear and insecurity, they help investors stay focused and disciplined, and vastly out-earn their fee. In fact, the advisor fee is one of the most inconsequential pieces of all this.
So an investment philosophy is very important. It will keep you from low-fee only investing. It will keep you grounded when the market hits turbulence. Ultimately, it will be a deciding factor on how and when you can retire, what you can do for your dependents, even the legacy you leave. It’s worth spending some time on.
At Cornerstone Wealth Partners we’ve spent a lot of time formulating our investment philosophy and we think it’s the best one out there. We know that returns come from owning the market, not trying to beat it (with constant trading and hedging); we know that strategic diversification offers the most return for the least risk; and we know that small and value companies outperform large companies over time (even though they’re more expensive to own). Most importantly, we know that staying disciplined in the market is tough, and having the help of a good advisor can make all the difference.
Our goal is to share our philosophy with as many people as possible and to help our clients become abundantly successful investors.