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What is an Investment Philosophy and Why Does it Matter?

Investment Philosophy and Why Does it Matter

A well-conceived and concise investment philosophy is widely held as crucial to investment success.

It may be even more important than an investment strategy, as your investment philosophy is the precursor of your investment strategy. Investment strategies may require adjustment with changing personal circumstances and market conditions, while your investment philosophy keeps you focused on your long-term objectives.

What is an Investment Philosophy?

An investment philosophy is a personal set of beliefs and principles that guide an investor’s decision-making process.

It is crucial for drafting the required Investment Policy Statement and is often included as the first paragraph of this document.

The investment philosophy should consider your objectives, needs, risk tolerance, time horizon and return expectations.

It may also provide guidance on your preference for a specific investment style (for instance value, growth, income or other) that may be employed to implement their investment philosophy.

Investment Philosophy and your Investment Manager

While your personal investment philosophy may not include an investment style bias, the investment philosophy of your investment manager should.

Their investment philosophy should lead them to specify the investment strategy and process being applied to achieve their clients’ long-term investment objectives.

It is optimal to work with an investment manager whose overall investment philosophy is closely aligned with your own to achieve a coherent implementation of investment philosophy to investment strategy in order to better meet your investment objectives and needs. 

Conciseness is Often Best

Your investment philosophy need not be overly long or detailed as specifics, parameters and strategies are laid out in the subsequent Investment Policy Statement.

Looking at the extreme, Warren Buffett famously stated his investment philosophy as “Buy wonderful businesses at a fair price with the intention of holding them forever.”

Like Warren Buffett, most investors that achieve long-term success develop and refine their investment philosophies over time and don’t abandon it in changing market conditions.

Ensure That You Get It Right!

As your investment philosophy is fundamental to all your future investments it is crucial that you get it right.

This is where a trusted financial professional who knows all your financial circumstances and needs can provide essential input by interpreting all your investment beliefs and principles into an actionable investment philosophy that can be effectively implemented by your other financial specialists.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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