Why You Need an Investment Philosophy

Townsend Asset Management Corp. |

Some believe that in a digital world where information travels at light speeds, the playing field between investors and institutions is more level. In reality, information overload can fuel more irrational behavior in investors than provide any advantage. Without a strong investment philosophy guiding your decisions and helping you focus on your goals, you may succumb to herd mentality, which may do more harm than good.

The same can be said for tech-driven investment models. These can create an overreliance on AI-generated portfolios that may lull investors into complacency. These models attempt to hypothesize future returns based on calculations that imply future uncertainties. In reality, it’s impossible to predict the market. AI-generated portfolios also assume that people will always act rationally and without emotion, which has been disproven. By sticking to your investment philosophy, you’re less likely to be influenced by computer-generated models or other investors.

Long-term investors stay laser-focused on their philosophy because they recognize that media noise impacts short-term outcomes and investment models don’t reflect reality. One of the world’s most successful investors, Warren Buffet, is able to ignore the noise because he knows it doesn’t matter. In building one of the most successful investment portfolios of all time, he has strictly adhered to his own investment philosophy:

“Buy wonderful businesses at a fair price with the intention of holding them forever.”

An investment philosophy doesn’t have to be intricate or involved. In fact, conciseness is seen as an indication of stronger conviction.

Your Investment Philosophy Helps Guide Your Strategy

Your investment philosophy is like a framework for your investment strategy. It should include clearly-defined objectives and the specific practices to employ. The following sample philosophy statement encapsulates a long term strategy:

  • Diversify broadly
  • Stay invested
  • Rebalance annually
  • Minimize investment expenses

The main items needed in this example are the specific methods for creating a diversified portfolio and rebalancing as needed to keep the portfolio aligned with one’s objectives and risk profile. The part about staying invested may feel difficult because it requires discipline and patience, which can discourage some investors. But with a well-constructed investment philosophy, you may have an easier time focusing on what’s important and potentially eliminate second-guessing.

When developing your investment philosophy, it may be helpful to have some insight into some of the more enduring investment principles and practices. Consider reading up on how some successful investors practice strict abidance to their philosophies. More importantly, you should have a clear understanding of your own objectives, core beliefs about money, and risk tolerance to develop a strong conviction in your investment philosophy.

Consider working with an experienced financial professional who shares your core values and beliefs about investing. Ideally, your financial professional’s own investment philosophy (be leery of professionals who don’t have one), is compatible with yours.

This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2021 Advisor Websites. Materials developed by third parties are considered to be reliable, but accuracy and completeness cannot be guaranteed. Townsend has obtained permission to distribute this material. This material has been prepared by a third party that is unaffiliated with Townsend Asset Management Corp. and is provided for informational purposes only. It may not represent the views of Townsend or its affiliates. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm can be found in its Form ADV Part 2, which is available upon request. 21-90