Investment Philosophy

In the short run, the market is a voting machine but in the long term, it is a weighing machine.
— Benjamin Graham
  • My philosophy and approach to building wealth through investing

If your financial plan is the destination, your investments are your method of travel. My investment philosophy begins with the belief that individual investors are their own worst enemy. This is not meant to sound negative, but behavior, above all else, is the primary reason investors tend to experience subpar investment returns. Your personal approach to spending, savings, and investing tend to have a much greater impact on your financial well-being than your ability to time the market, pick outperforming stocks, or predict the future. 

For this reason alone, your personal financial plan should be of top priority. Again, your chosen investments are merely tools or vehicles used to get you to a particular location.

By using a simple and effective strategy, which we will complete together, you will be much better equipped to achieve your financial goals.

My three principles:

  • Keep the Faith. If you pay close attention, you'll notice that crises, market crashes, recessions, and panics all come and go. They are all a byproduct of capitalism and human behavior. I encourage you to have faith in mankind's ingenuity to confront manmade conditions and to invest with purpose and optimism.  

"No problem of human destiny is beyond human beings." John F. Kennedy 

  • Be patient. Resist the impulses created by the anxiety of current events. You are investing based on your lifespan, not the news cycle. Whenever you read about the crisis du jour, repeat the mantra, "This too shall pass."
  • Stay disciplined. Stick to the plan through the fads, the fears, and the fluctuations of the market. Discipline and positive thinking will work to help ensure you benefit from your investments over the long term.

Consider investing as if you believed that the broad market can never go to zero. That mindset will allow you to stay patient, disciplined, and, most importantly, invested during the next market crash. In fact, it might provide you the fortitude to recognize the opportunity to invest at a deep discount.

To summarize, the stock market itself is unable to affect permanent loss upon a well-diversified equity portfolio; it is possible only through poor decision-making and lack of discipline.

HOW I INVEST

I teach and utilize a simple and effective method of investing. This includes recommending investments after fully considering aspects such as your willingness and ability to accept fluctuations in the value of your accounts.

When applied correctly, proper asset allocation across numerous different investment classes (i.e., selecting the right place for your money), can help optimize your total investments. 

PASSIVE

Indexing, or passively investing in a predetermined market index, has become widely popular in recent years. A passively managed mutual fund or exchange-traded fund (ETF) will invest in the securities listed in an index such as the Dow Jones Industrial Average, the S&P 500, the MSCI World Index, or similar widely-used index.  

  • Arguments in favor:
    • Low-cost  
    • Highly diversified
    • Consistent performance compared to benchmark
    • Uniformity of fund composition
    • Arguments against:
      • No potential for outperformance
      • Trade execution within ETF's have led to tracking error and liquidity issues during market tumult
      • No potential for reducing volatility when compared to the benchmark

ACTIVE

You may be familiar with actively managed, open-ended mutual funds. The idea surrounding active investment management is to hire a professional team of "stock-pickers" to pursue a style of management listed in their prospectus in an effort to outperform the market in excess of the fees they charge to manage clients' funds. 

  • Arguments in favor:
    • Professional management and security selection
    • Potential for outperformance
    • Typically lowers volatility and risk compared to benchmark
  • Arguments against:
    • Inconsistent performance compared to benchmark
    • Higher cost and internal fees for management
    • Large mutual funds can experience "asset drag," where obtaining the best prices for trades can be affected by large, block trades
    • Can be non-diversified and concentrated in a particular sector or industry
    • Management turnover and conflicting incentives for management compensation
    • Embedded capital gains can cause tax liabilities

WHICH IS BETTER? 

Fortunately, you are not obligated to choose one method over the other. By pursuing a strategy that uses both actively-managed mutual funds to pursue outperformance and passive ETFs to lower costs, you can combine the advantages of each and limit the disadvantages of both.

In my experience, however, the argument in favor of actively managed funds requires undue confidence in one's ability to predict future performance based on historical performance. Using the past as a time reference, it's rather simple to assemble model investment portfolios with actively managed mutual funds that can outperform the market.

Therefore, if an investment manager or advisor proposes to invest your funds using an allocation of top-performing, actively-managed mutual funds that have outperformed the market, a benchmark, or your current portfolio over the last three years, politely ask him or her the following questions. 

  • Has the selection of funds you are recommending in this allocation changed in the last three years? (It probably has.)
  • If so, do you keep records of the funds you recommended three years ago? (They should.)
  • How have the funds you recommended three years ago performed compared to the funds you recommend today? (You can probably guess.)

The value lies not in identifying the mutual fund that just outperformed, but in identifying the mutual fund that's about to outperform. This is a much more slippery proposition.

Research has shown the most relevant criteria by which to predict superior actively-managed fund performance has more to do with the fund's internal cost, how frequently the fund's assets are turned over, and how the portfolio management team is compensated. 

Why is cost so important?

In my experience, the most effective method of delivering performance in investment portfolios is to seek a high level of diversification across all asset allocations at the lowest possible cost. This can best be accomplished with an emphasis on passive investing, with careful and deliberate inclusion of active mutual funds chosen for their approach and philosophy.

Cost is critical, and costs can add up quickly if you're not paying attention. Consider all expenses typically involved with investing (e.g., expense ratios, transaction cost, and management fees), and it's not uncommon to see individual investors paying more that 2.5% per year in expenses alone. 

For these reasons, the prospect of outperforming the market on a risk-adjusted basis is a rather grim undertaking. My belief is that all-in investment expenses should be below 1.5%, including both my investment stewardship expense and the internal expenses inside the individual funds themselves.

In an environment of low interest rates and low expected equity returns, high fees in your investments serve as a headwind on the growth of your assets. A diversified, low-cost approach, when incorporated with comprehensive and proactive financial planning, is a recipe for investing success.