Forming Your Own Investment Philosophy
Most people don’t sit down one day and decide, “This is my investment philosophy.” Instead, our ideas about investing (and money in general) tend to develop over time. They may be shaped by our parents, our first experiences with money, a previous advisor, the financial news we consume, or dialogue we see on social media.
But when it comes to forming an investment strategy—making decisions about how, when, and where to invest—having a clear understanding of your own investment philosophy matters. It gives you a framework for decision-making that’s aligned with your values, your needs, and your personal level of comfort with risk.
Start with what you want your money to do
Before deciding how to invest, it helps to understand why you’re investing. Are you trying to grow wealth for decades to come? Preserve what you have? Create income in retirement? Leave money for the next generation?
Your goals and timeline should help shape the way your portfolio is built. Someone with decades until they need to rely on their investments may be comfortable taking on more market risk than someone who expects to begin drawing from their portfolio soon. The important question is not simply, “What should I invest in?” It’s, “What do I need this money to do for me?”
Be realistic about your comfort with risk
It’s difficult to gauge your comfort level with market volatility until it happens but imagine opening your account statement and seeing that a $500,000 portfolio is now worth $450,000. How would you feel?
The key to a strong strategy isn’t to control your emotions but to understand your comfort level with risk and build your investing philosophy around that. What looks perfect on paper may not be the right strategy for you if you are unlikely to stick with it when markets become uncomfortable. Your investment philosophy and the strategy that unfolds from it should reflect not only your financial capacity to take risk, but also your ability to live with the uncertainty that comes with it.
Build a strategy you can stick with
One of the key benefits of having a clear investment philosophy is to help you avoid making major decisions in response to short-term market conditions. Headlines change. Markets rise and fall. Economic forecasts shift. Your long-term goals usually do not change nearly as quickly; and neither should your investments.
That’s why an investment strategy should be built to work across a variety of market environments rather than around a prediction about what will happen next. The goal is to build a portfolio that aligns with your goals, timeline, and risk tolerance well enough that you do not feel compelled to reinvent your strategy every time the market moves.
Understand the trade-offs
Your investment philosophy also includes beliefs about how a portfolio should be managed. Some investors and advisors favor individual stock selection or more active, tactical strategies. Others prefer a broadly diversified approach designed to capture market returns over time. Neither decision should be made simply because it is familiar or because someone else is doing it.
Instead, understand the trade-offs involved. Active strategies may involve higher costs and the risk of underperforming the broad market. More passive, diversified approaches may require accepting that there will be periods when certain parts of the market outperform your portfolio.
The important thing is to understand what you believe, why you believe it, and what risks come with that approach.
Make sure your advisor’s philosophy aligns with yours
Investment philosophy matters when choosing a financial advisor, too. Two advisors can look at the same investor and recommend very different approaches. Asking a few direct questions can help you understand how a particular advisor manages money.
You might ask:
- How do you manage client portfolios during market downturns?
- How diversified is your investment approach?
- Do you make tactical changes based on what is happening in the market?
- How and when do you rebalance portfolios?
- Do you have discretion to make trades on my behalf, or will you contact me first?
The answers can reveal a lot about whether an advisor’s approach aligns with your own expectations.
Just as importantly, pay attention to the questions the advisor asks you. A good investment strategy should come from understanding your goals, timeline, spending needs, risk tolerance, and priorities. If someone is recommending investments before they understand what you need your money to accomplish, that may be a sign that the process is starting in the wrong place.
Know yourself first
Ultimately, developing an investment philosophy requires some introspection. Know your goals. Know when you may need the money. Understand how you respond when the value of your investments changes. Think about the trade-offs you are willing to make. Then build a strategy around those answers. And if you choose to work with an advisor, work with someone who is interested in understanding them, too.
A sound investment strategy is not about predicting what the market will do next. It is about knowing your own mind, forming your own investment philosophy with intention, and using it to create a strategy you understand, believe in, and can stick with when the market inevitably gives you a reason to question it.
