How do I make an Investment Philosophy?

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Welcome to Finance and Fury

Today we are going to talk about how to implement an investment philosophy. It is a coherent way of thinking how you fit into your investment plan. It is a mission statement to follow when investing.

It can help with understanding the types of investments you should be making, and avoid mistakes that influence your investment behaviour.

What is it:
  • Core beliefs for your investment strategy
  • Investment philosophy vs investment strategy
Why is it important?
  • Think about your investment strategy as your purpose
  • A philosophy outlines a purpose and helps you stick to it
  • Benefit from long term investing
  • Avoids making rushed decisions
How to make an Investment Philosophy:
  • How do you learn?
  • What do you know about investments?
  • What else do you need to know?
  • What are active and passive investment styles?
  • How capable are you to do it yourself?
  • How much time do you have?
  • Is there value with outsourcing it, and gaining a comparative advantage?
  • What are your goals? Why are you investing? What are the timeframes?
  • What do you want from investing?
  • What is your risk tolerance? What are you willing to invest in?
  • This helps you avoid emotional investing, as you have invested in alignment with your investment philosophy
  • What is the risk-return relationship?
  • Figure out which investments fit in your philosophy
How will you live by it?
  • Keeping it as simple as possible
  • Always remember you are investing in your future
  • What is the opportunity cost?
  • Think in the long term and big picture, what does the future look like?
  • How much will you need? The rule of 20
  • Don’t try and go for big wins quickly
Things to remember:
  1. Quality – don’t invest with high hopes of large gains, losing funds will destroy your future
  2. Diversify – at least 15 – 30 companies
  3. Remember – invest in line with the big picture
Living by your philosophy:
  • Negate the emotional side of investing
  • Daily habits and prioritisation
  • Be patient and be honest with yourself
Putting financial habits in place:
  • One small thing at a time
  • Good habits come from positive feedback loops of cue, action, and reward
  • The Pareto distribution - 80/20 rule

What is one thing that you can do to better your future self?

Summary:
  1. Start with yourself - Write out what you know and how comfortable you are with investing
  2. Look at your capabilities – Do you need to learn more? Or can someone do it for you?
  3. What are your goals?
  4. Set up one page to write out your investment statement – top-level picture/vision of your investments
  5. Keep it in your habits every day

My investment philosophy:

  • Investing consistently in long term growth investments
  • I look at 30% index funds and 70% active funds
  • My active funds are split between small cap, emerging markets, and international shares
  • I reinvest all income earned
  • I hold reserves in cash for when markets go down
  • I invest in high-quality assets, diversified across the board
  • Looking at spending vs investing
  • Making regular investments split between super and personal investments
  • Set up automatic investments into quality assets, keeping transaction costs low

That is an example of an investment philosophy, something to live by that you can stick with. From here, you can build your investment strategy.

Set up what you want to achieve, and some simple rules to live by every day. This will help get a strategy in place.

Next week: Look at an appropriate investment strategy and the strategy side of the philosophy. Also, what to target in terms of asset allocations and investment selections.

Thanks for listening and feel free to get in touch if you have any questions or want to know how you can achieve financial goals. You can do so here.

If you liked the episode, give us a review on iTunes, and if you didn’t like the episode, let us know.

Resources:

Invest in yourself and investment purpose: https://financeandfury.com.au/one-of-the-best-places-to-invest-in-2019-is-to-invest-in-yourself/

Rule of 20 in the form of taking control of your money - https://financeandfury.com.au/take-control-of-your-money-nobody-else-is-going-to-do-it-for-you/

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