With an investment philosophy, you always know how you will invest and why.
For example, let’s say you decide to go on a long cross-country hike to a beautiful mountain lake. It will take a couple of days, and the path will be steep and wind through forests and fields. Before setting off, most of us would get the right gear together, make sure we have enough food, and carefully map our route. We wouldn’t put a bunch of random things in our backpacks and just head off in the general direction of the lake.
Unfortunately, too many investors invest precisely this way. They are gathering investments together without a plan or purpose beyond hoping for good returns. Generally, they are disappointed. Or worse, get lucky and confuse luck with insight because they can’t see the difference.
With an investment philosophy, you have factored in good markets and bad, and won’t be swayed by hype or panic. Hope, gut instincts, and tips from your brother-in-law or CNBC are not investment philosophies. Instead, your investment philosophy should always do what it is supposed to, and it should be rational, defensible, and repeatable.
No investment philosophy will work 100% of the time, but if your philosophy is prudent and evidence-based, chances are it will get you where you want to go over the long term.