Why a solid philosophy and strategy will make you a better investor

Take a good look at your investments. Are they all based on solid investment philosophy and strategy? Or a random mix selected based on factors like your mood or a hot tip from a friend of a friend. If it's the latter, then maybe it’s time to get back to basics. It’s good investment hygiene and will stand you in good stead in the years ahead.

Chances are you already have an investment philosophy and strategy without realising it. Maybe you mostly buy blue-chip shares or maybe you avoid certain companies. Sitting down and setting out your philosophy and strategy will not only make investing easier for you, but it could also be better for your returns.

What’s your flavour?

Your investment philosophy is the combination of your values and your principles for investing. It should also factor in your investment goals. If that sounds similar to an investment strategy, that’s because a clear philosophy should drive and direct your strategy.

Looking at some of the investment philosophies of fund managers can be a great starting point.

For example, Platinum Asset Management’s philosophy speaks to their belief that market sentiment can result in company share prices deviating from their intrinsic worth:

“The temporary divergence between the inherent value of a business and the market’s perception and expectations of it, as reflected in the company’s share price, is the opportunity that we seek to exploit.”

By this, investors can surmise that Platinum’s approach is:

• Active and fundamental – they research individual stocks.
• Contrarian – they invest against market sentiment.
• Value-focused – picking opportunities where there is a mismatch between price and intrinsic value can also be described as identifying value investments at a discount.

You can start to see how a philosophy then starts to feed into a clear strategy.

Another slightly different example comes from financial adviser Antoinette Mullins of Steps Financial.

“Investments are aimed at making money, either through income producing assets, or long-term capital growth, or a combination of these two. However, you should minimise risk wherever possible – choosing good quality fund managers and investments is obvious and so is diversifying your portfolio to minimise the risk.”

She describes her approach as a Rubik's Cube where depth and diversification matter.

In turn, you can see that Antoinette’s philosophy focuses on making money with an eye to risk management so her strategy would require her to look at:

• High-quality investments in terms of balance sheets, management style, and outlook.
• Experienced fund managers with strong reputations.
• Diversifying across managers, styles, sectors, countries, and asset classes.

You can also incorporate your personal values within a philosophy. Australian Ethical (ASX: AEF) specifically outlines their views on companies with an ethical and sustainable approach. They differentiate the future from a financial perspective as well as a moral one.

Where to start?

You can be as broad or as specific as you want. Some things to think about in developing your philosophy are:

• Your personal values and beliefs i.e. are specific industries a no-go for you? Do you want to achieve something beyond your returns?
• Investment views, for example, do you only believe in actively investing, passively, or are you happy to use a combination depending on what returns are available?
• Your risk tolerance – that is your ability to withstand loss and your comfort levels with this. A high tolerance to risk might mean a wider variety of investment options, a lower risk tolerance might require more tailoring.

Your philosophy can be as long or as short as you want – it’s about you at the end of the day.

And on to the strategy

The strategy is the practical way of implementing your philosophy – your guiding principles to apply to your portfolio and every investment you choose. If you’re new to the game, speaking to an expert like a financial adviser can be a really useful approach.

Financial adviser Ron Pratap of RP Wealth Management had the following tips for developing a strategy.

1. Consider your income, expenses, desired emergency cash reserve, and what funds you have to invest.
2. Identify your goals, risk tolerance, and how long you are willing to invest funds.
3. Think about diversification and how assets perform together and in isolation to plan out an appropriate blend for you.

Some tips he has for those starting out is to look at value investing, noting that the current market environment might hold some opportunities to find some bargain high-quality companies. And when it comes to portfolio construction, he advocates the core-satellite approach. That is, holding your ‘core’ investments in long-term, passive, value investments and then using ‘satellite’ positions to tilt your portfolio towards tactical opportunities or views.

A final word of advice from Ron is to stay on top of news and developments and adjust your strategy if needed:

“Investment markets are everchanging and it is always a good idea to regularly review your investment strategy and goals and realign if needed. Taking profit and considering tax consequences when doing this is important as well.”

Hitting the bottom-line

It’s fair to say that the right investment strategy can make a difference in returns – just take a look at the range of performance offered by different fund managers over time.

From a personal perspective, having a solid investment strategy and philosophy can be a benefit in a few ways:

• It gives you a better guide for what and when you invest (this actually makes it easier to invest)
• It gives you more structure so you avoid those ‘random’ investments which don’t necessarily add to your portfolio.
• More selective use of your investment funds.

Finally, if you’ve set out your strategy, it can be easier for you to work out if your investments are working or not and adjust if needed. 

How does your investment philosophy shape your investments? Share your philosophy below.

Frequently asked questions

What is an investment philosophy?

An investment philosophy is the combination of your values and principles for investing.

What is an investment strategy?

An investment strategy sets out the guidelines for how and when you invest, factoring in your philosophy, needs, goals, and circumstances.

This article is part of our Investment Guide series.