Philosophy Differs From Strategy



by Rick Ferri

Want to be a successful investor? Have a sound investment philosophy before trying to create an investment strategy. Your core beliefs about investing should drive strategy and also keep you disciplined in difficult markets.

Attaching yourself to a sound philosophy requires deep thought. It usually starts with a disappointment, a detailed investigation in the root of the disappointment, the analysis of data, confirmation through the writings and experiences of others, and then an epiphany.

Vanguard founder Jack Bogle had his epiphany in the early 1970s after being ousted from the leadership spot at Wellington Management Company for a bad acquisition. This led him to create the world’s first successful index fund at Vanguard in 1975.

Bogle provided my “aha moment” about investing in 1996 while reading his first book, Bogle on Mutual Funds. I was deeply disappointed with the performance of my client’s accounts. I had been using company recommended products and money managers while working at a national brokerage firm.

Through Bogle and my own experience, I realized that the basic returns of financial markets were all investors needed to reach their financial objectives. Trying to beat the markets was costly and counterproductive, and usually resulted in lower overall returns. I’ve since been an advocate for low-cost index fund investing and have never looked back.

With philosophy in hand, a portfolio strategy can be created. This is a mixture of learning about products, fees, diversification, asset allocation, tax management, risk and everything that goes into developing a long-term portfolio for your needs.

Many books and articles have been published that cover portfolio construction using index funds and exchange-traded funds (ETFs).  I’ve written several books on the subject. There’s also a list of Lazy Portfolios on the Bogleheads’ wiki website. These resources are a great starting point for a newly enlightened investor.

A word of caution at this point: I find that newly enlightened self-managed investors can spend a considerable amount of time and energy trying to figure out a perfect portfolio by seeking a perfect asset allocation, perfect products, perfect tax-efficiency and a perfect maintenance methodology. Don’t bother.

There is no such thing as a perfect portfolio. We’ll only know what was perfect in retrospect. There is, however, a portfolio strategy that will meet your needs. It’s conceived from your financial situation, your understanding of risk, your time horizon and your desires.

Having the right portfolio leads to the final link in the chain. It’s called discipline. Strategy breaks down when there is no discipline. Discipline breaks down when a strategy doesn’t follow a philosophy. It’s all related. If done correctly, you’ll design a strategy that withstands all market conditions – and this is the most important attribute of a well-designed portfolio.

I’ve been writing and presenting on this philosophy for decades and continue to do so with a passion. However, my learning curve about teaching this approach to investing was slower than my knowledge of strategy. At first, I approached the concept from the product perspective – just buy index funds because they’re better for you. I’d then jump right into the mechanics of the strategy: fund recommendations, asset allocation, ways to implement, etc.

This nuts-and-bolts-centric advisement process worked fine as long as the markets cooperated. Problems occurred when the markets went down. I found that some clients jumped ship. This isn’t good for anyone.

I realized that those who capitulated didn’t have a good grasp of the philosophy. They were investing because I told them to do it this way. They were not investing because they understood or believed. This was a problem. After this second epiphany, I’ve spent a great deal more time talking about philosophy and far less time talking about products and portfolio design.

Philosophy is universal; strategy is personal; and discipline is required. Philosophy acts as the glue that holds everything together. Philosophy first, strategy second and discipline third. These are the keys to successful investing.


Copyright © Rick Ferri



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