Successful investors, whether they are managing their own portfolios or professionals managing their client’s portfolios have an investment philosophy and process. Having core investing beliefs and a repeatable process is step 1 in being successful when investing in capital markets.
To help illustrate this point, below is an excerpt from A Wealth of Common Sense written by Ben Carlson.
An investor without a well thought out investment philosophy might as well be throwing their money away in a Ponzi scheme or putting ear drops up their butt, because there’s no use in implementing a portfolio strategy without first understanding your investment philosophy. An investment philosophy is simply a set of principles that will guide your actions when making portfolio decisions. It’s your core beliefs.
It may seem like a minor distinction, but an investment philosophy must be determined before a portfolio strategy can be implemented. It’s much easier to listen to a sound bite or top-10 list of tactics than to actually set out a list of principles that outline your investment philosophy, but the philosophy is so much more important. It’s how you determine your investment plan, and everything else falls into place from the broader philosophy.
The first point to understand is that there is no such thing as a perfect portfolio, a fool-proof system, a best-in-class asset allocation, just the right amount of risk to take, or the best time to buy and sell. Let go of all hope of ever finding precision in the financial markets. There is no such thing as stable relationships or rules that work at all times. Investment strategies are only perfect in a sales pitch. Your unique situation and personality type should dictate your philosophy. No style will work for everyone.
Philosophy leads to an investment strategy which leads to portfolio construction which is all worthless if you don’t have a process in place that allows you to follow each of these steps. Without an understanding of your philosophy you will almost surely jump ship at the first sign of trouble in the markets or your portfolio. An investment philosophy will get its true test during a market correction or crash. Doubt will begin to seep in. Temptation to make changes to your process will slowly creep into your psyche. Defining yourself as an investor can help relieve this issue.
Mr. Carlson makes some excellent points.
Coming into the week the S&P 500 index had seen YTD returns of 5.88% and the MSCI EAFE had YTD returns of 0.11%.
There are several indicators of an uptick in global growth and inflation on the horizon, including flash estimates of around 3% annualized growth rate in global manufacturing.
The first estimate of 3Q16 GDP is for an expansion to 2.9% q/q saar (quarter over quarter seasonally adjusted annualized rate) from 1.4% in 2Q. Nonresidential fixed investment on structures grew by 10%, and general economic growth appears to be accelerating in the second half of 2016.
The September US jobs report was below expectations, adding 156,000 jobs, and increasing the unemployment rate up to 5%.
Third quarter earnings season is underway with over 60% of S&P 500 companies already reporting. Earnings per share looks to grow by 14.5%.
The Fed continues to use rhetoric implying a rate hike in December.
