To build an Investment philosophy is to build a road map that guides your investment strategy and process. It is the framework that helps you make investment decisions, based on your beliefs and principles that correspond with your financial goals and tolerance to risk. A lot of investors lack clarity about the importance of a clear philosophy and well-considered strategy.

TABLE OF CONTENTS:

Why is an Investment Philosophy important?

To build an Investment Philosophy an investor needs to have some guiding beliefs about markets. If we think of Investment Philosophy as Why you invest, we can think of Investment Strategy as What to invest in which drives the Investment Process of How you invest. These beliefs will act as a financial compass steering you towards your goals.

Investors need a Roadmap to navigate the markets.

A carefully thought-out investment philosophy helps investors to navigate the markets and is the foundation for all investment decisions. Therefore, helping investors stay the course through all the ups and downs. The entire segment of the Investment Philosophy component elaborate on a few of the questions below to explain how each may impact your investing journey.

Below are a few thought-provoking questions that investors should ask themselves. Take your time to think and build an investment philosophy. Once you have them down, understand that an investment Philosophy will change over time. Evolving as your time horizon changes and your experience increases.

Outline your initial beliefs about Markets.

An investment philosophy starts with your view about markets, how they work, whether they are efficient in your eyes and the types of errors you believe you can gain from. Do you believe you can beat the market? Or perhaps you’d rather have a return in line with the market average? Do you view the market as a casino or a strategic place to generate long-term wealth?

Is your Investment Philosophy suited to your Psychology?

You need to ensure your Investment Philosophy aligns with your behaviour. If you are prone to gambling and being anxious then joining day trading forums is going to wreck you. Consider your biases and some of your flaws, are you patient enough? Do you have the discipline to stay the course? Are you wired to be an active stock picker or will passive investing be a better suit?

Have you got ideas about your time horizon?

Time horizon is important because it can help drive what to invest in to maximise your overall returns. If you have short-term goals, then risking in the stock market is not ideal. Do you have a long-term goal where you can allow a long-term compounding strategy to work? Defining the length of time can ensure your asset allocation and risk tolerance are aligned with the time frame. Do you have 5 years? 10 years? 30 years?

Why do you want to invest?

The “why” here refers to your financial goals and beliefs in the market. The stock market is known to be one of the most effective ways of creating wealth. Are you interested in investing to benefit from this? What are your financial objectives? Do you plan to retire early, seek independence, generate long-term passive income, increase your net worth, or buy a family home? What motivates you to invest for your future?

What do you want to invest in?

This can help shape the sectors of the market that interest you. What are you looking to invest in? What are your investment criteria and how will you pick stocks? Small caps? Large caps? Certain industries? Asset classes? What types of businesses do you want to own?

How do you view Active Vs Passive investing?

Do you believe passive investing is a better strategy? Do you believe you have what it takes to be an active stock picker? Perhaps a combination to maximise both strategies. Remember no false dichotomies here. You are allowed to do both. What will help you implement your philosophy and strategy better? Do you have the curiosity and passion to sift through companies or do you want to participate in the long-term returns of the market with little involvement?

Where does your circle of competence lie?

You already have a circle of competence whether you are familiar or not with it. Start thinking about what you are passionate about and what your hobbies are. What do you already know? Do you have sector or industry experience from a job or education? Do you have an analytical edge? Behavioural edge? Are there certain things that interest you that you don’t mind diving into and learning about? Are there weak areas that should be avoided? Knowledge gaps? Can you analyse and understand businesses?

Do you gravitate to a certain Investment style?

Does a certain investment style jump out at you? Do you read and gravitate to Value investing or perhaps Growth investing? Does fundamental analysis make sense to you? Does ETF and passive investing make sense? Do you like the idea of dividend income? Perhaps investing in the next big thing draws your attention to growth companies, or maybe buying bargains suits your appetite for risk and character traits. Think and read about different investors with different styles, chances are one will speak to you.

What don’t you align with and will avoid?

Perhaps you find the idea of day trading while staring at a screen too stressful, or maybe investing in small-caps and micro-caps doesn’t seem like a wise decision. You should identify the investment strategies that you want to avoid, whether it’s high growth stocks or companies that appear undervalued. It could be that active trading is not for you or that a buy-and-hold approach does not make sense.

Are you aware of the risks involved?

What is your risk appetite? Think about your risk profile – are you conservative or aggressive? Do you prefer to avoid losses at all costs or can you handle some loss? Do wild fluctuations scare you or do you embrace volatility? Can you handle the risk and loss? Do you have a long enough time horizon to pursue higher risk/reward returns? It’s important to remember that nothing is guaranteed. Certain strategies and styles require specific disciplines, and each has different risks associated with them. Are you aware of these risks?

What are your views on cash and inflation?

What are your thoughts on holding cash? Are you willing to wait for the right investment opportunities, or do you feel the need to be fully invested in the market? Are you concerned about inflation and the potential impact on your purchasing power? Does your investment strategy can help you combat the long-term effects of inflation? Do you feel comfortable holding cash and waiting for the right opportunities, or do you prefer to be fully invested to avoid the risks of inflation?

What are your beliefs around diversification?

What are your beliefs about diversification? Do you believe holding various asset classes is wise? Or perhaps a concentrated portfolio of your best ideas? How many positions do you feel comfortable holding? Does your passive and active approach correlate with your views about diversification? Are you aware of what diversification is and how will this fit into your strategy?

Can your Investment Philosophy be turned into a strategy?

When implementing a strategy, it is crucial that the strategy aligns with your philosophy. Your philosophy must be well-defined so that it can provide direction to the strategy on where to start the process. It should not be contradictory, and one area of the philosophy should not cancel out another. Your philosophy should be refined enough to provide a framework that guides the strategy. By addressing all these aspects, you can narrow down the strategy and make it more effective.

Putting the Investment Philosophy together.

The final piece of the puzzle is putting everything together to form your Investment Philosophy. To help you with this, I have created a FREE PDF Investment Philosophy Guide which you can download below and use to start throwing some ideas around. The ultimate goal is to summarize your ideas into a mission statement that can be explained in a few words. This should include why you are investing, what you are investing in, and what your process is.

Having an overall investment statement can form the basis of your entire investing approach. This will come in handy when someone asks you about your investment strategy. You should be able to answer confidently and simply, instead of giving a long and complicated answer that will confuse others.

Remember, your investment strategy and process can change and adapt to changing circumstances. However, your core investment philosophy should remain constant and give you a framework for all investment decisions. Staying true to your philosophy is crucial for long-term success in the markets. Don’t try new investment styles every month and think that they won’t work. Money can be made in all scenarios if you have a rigorous and disciplined philosophy, strategy, and process.

💡Investment Philosophy & Strategy Guide

Download a free PDF Fillable copy of an Investment Philosophy and Strategy Guide. This can help to drive your investment process by knowing Why you are investing and What to invest in.

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