Why Every Investor Needs an Investment Philosophy

It's ok to speculate, but focus on getting the big things right...

It’s never been easier to invest. And it’s never been harder to invest intelligently. - Jason Zweig

Investing today is both easier and harder than ever. You can simply download an app to your phone, link a bank account, and start placing trades at no cost (well, not really, remember expense ratios…)

When you used to place a trade on Robinhood, confetti would start pouring down your screen, congratulating you on investing. This has since been removed as they faced intense scrutiny for the gamification of trading.

But it’s gotten worse.

Every other commercial and billboard is reminding you to open a DraftKings account and to gamble. We get constant news alerts on our phones, social media “influencers” pitching stocks or telling us how they became wealthy. Robinhood now offers 24 hour trading. We have zero date options and alternative investments “alts”.

Tony Robbins even dubbed alts as the “Holy Grail of Investing” in his new book, as if the secret to building wealth all along was buried in complex investments…

Dodge Coin, which started out as a joke, is currently more valuable than Ford, Delta Air Lines, and General Mills.

As an investor, it’s very easy to lose focus — and your money.

That’s why you need to develop your own investment philosophy and stick to it.

An investment policy statement is simply a plan. It doesn’t need to be complex; in fact simplicity often works best.

Jason Zweig interviewed Charles Ellis almost 25-years ago and this was his advice:

Ask, “What is it I can trust myself to do in good times and in bad?” Then write it down on one side of a single sheet of paper — when you’ll put money in, how you’ll manage it, when and why you’ll take it out. The best plan, for most of us, is to commit to buying some index funds and do nothing else. Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong.

Investing should be boring a lot of times. Own a diversified group of index funds, invest consistently, and be patient.

Seems easy, yet so many people I talk to still don’t get it.

They continue to chase performance, rush to the new products, try and time the market, trade constantly, are overconfident, and don’t recognize their own biases.

While it’s okay to speculate with some of your money, you need to be real with yourself and recognize it for what it is: gambling.

Feeling the rush of putting your chips on red or black is enticing and entertaining, but the odds are not in your favor.

Not to mention that excitement can be addicting. You can quickly find yourself in a hole with a slew of bad habits.

Which is exactly what these companies want. Their goal is not to make you wealthy—it’s to keep you trading.

Ask yourself, do I want to play in the casino, or do I want to own the casino?

Owning a diversified basket of companies may be “boring” but it works just fine.

Remember, we want to become owners. It’s easy to hear the word “stocks” and forget these represent actual ownership of companies.

Many of us already invest responsibly by participating in our company’s 401(k), 403(b), or 457(b) plans.

But the key to investing isn’t mastering the market; it’s mastering your own emotions and sticking to a plan. Of course there will be months or even years when the market is falling and you are nervous.

The difference between a successful long-term investor and a trader is we don’t act on that fear. Instead, we remind ourselves that in order to receive the stock markets historical average return, which is well and above inflation, you must ride out these temporary declines.

Behind every market dip or crisis, there are companies working to innovate, grow, and reward their shareholders over time.

So, what should be in your plan? There is no right or wrong answer but focus on getting the big things right. Pay down debt, increase your income, build a cash reserve, and think long term.

A solid investment philosophy is one you can live with for the next 30+ years.

The next time a lump sum of cash comes into your life, don’t ask “what stock should I buy?”

Instead, ask, “How can I use this cash to continue to make myself financially unbreakable?”

Investing should be consistently boring.

But that’s how you win, or should I say, that’s how you don’t lose.

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

All investing includes risks, including fluctuating prices and loss of principal.