A legendary investor once observed that the most important thing about an investment philosophy is that you have one. Here’s what Minchin Moore believes about investment and why following those principles has helped our clients in countless ways.
Overview:
Why do you need an investment philosophy? Perhaps the best way of answering that question is to look at the potential consequences of not articulating a set of guiding principles before you start seeking to grow and protect your wealth.
For instance, merely saying you want to generate the best returns doesn’t mean very much if you don’t anchor that aim in the context of your goals, risk appetite, cost, transparency, timeline, or the nature of your existing investments.
A philosophy is not a wish-list. It’s a set of clearly expressed principles, set out formally in an investment policy statement, that guides your financial decision-making in an uncertain world. It provides a framework for making consistent and rational investment choices that align with your goals, risk tolerance and horizon.
Starting without a philosophy is like building a house without foundations. The risk is you are blown away by short-term market volatility and make impulsive decisions inconsistent with your goals. Or you are tempted by past performance, or sacrifice liquidity and transparency in random investments that bear no relation to anything else in your portfolio.
At Minchin Moore, we see this sort of behaviour in our industry all the time. Investors, often encouraged by order-taking advisers, fall prey to trends and fads. Without a pre-agreed guiding framework, they fail to diversify or wrack up massive transaction costs in vainly try to time the market.
Lessons from History
Think about what happened during the pandemic. Major global equity indices fell 30% or more in the space of a few weeks when Covid first hit. Many investors panicked and sold out. By the end of that year, markets were up.
When people did creep back into the market, during the long lockdowns, there was a surge in hobby trading from home – in so-called ‘meme’ stocks or sector-specific plays or crypto currencies. Most of these forays ended badly.
An investment philosophy helps instil discipline in these times. Incidentally, by ‘philosophy’ we do not mean high-minded and impractical principles. Quite the opposite, in fact. Articulating and embracing a philosophy recognises the realities of investing – both in terms of the inherent frictions and complexities of markets and the behavioural quirks of humans.
And guidelines are not just for inexperienced investors. Even Nobel Prize-winning financial economists make the initial adoption of an investment philosophy a priority for themselves before they even consider where and how to invest.
Evidence, Not Luck or Hunches
To be sure, there are always those who get lucky with an investment. They roll the dice on a stock market float, or they punt on a mining stock before a large discovery, or they get into or out of the market just in time. But that sort of windfall is not repeatable as it hangs on factors outside an individual’s control.
And that is why Minchin Moore’s investment philosophy is grounded in evidence about the long-term drivers of return. We don’t depend on fashion or forecasts. We don’t try to time the market or second-guess prices. We look at hard data and make systematic decisions within areas we can control.
The investment principles we base our approach on have been built up over more than 60 years via the most rigorous academic research.
But you don’t need a PhD in finance to grasp the handful of core beliefs that our experience shows deliver the best outcomes for our clients, whatever their circumstances and goals. Here, in a nutshell, is what we believe:
1. Let Markets Do the Work
Investment is one area where intense activity is not well correlated with success. We know what drives returns in capital markets, whether it be equities, bonds or property. Instead of picking stocks or timing markets, the best approach is to let markets do the work. Once your personal plan is in place, your job is to stay out of the way as much as possible. The more you interfere by switching in and out or fiddling with your portfolio components, the lower your long-term return is likely to be.
2. Beware the Behaviour Gap
There is often a substantial gap between the long-term returns available from markets and the returns investors receive. This is due to human behaviour – market timing, concentrated portfolios, costly trading and chasing fads. But it doesn’t have to be this way. Returns are there for the taking if you exercise diversification and discipline. So focus on what you can control, like diversifying broadly, establishing a framework for effective decision-making and rebalancing systematically.
3. Ditch the Crystal Ball
The bad news about investing is there is no crystal ball. The good news is you don’t need one. Markets are efficient. That just means they instantly price new information – about the economy, earnings, geopolitics, sentiment, technological change and a host of other variables. That dynamic environment is why accurate forecasts are so hard to make and why the models they are based on so easily fall apart. But if you accept that available information is already reflected in prices, you don’t need to outguess the market.
4. Focus on What Drives Returns
While short-term market movements are hard to pick, academic research has identified what drives outperformance over the long term. These are each portfolio’s exposure to certain premiums – size, value, profitability and momentum in stocks, and term and credit in bonds. Knowing this, we can systematically orient portfolios towards these factors while remaining highly diversified and keeping costs low. This is a better approach, both in terms of delivering outperformance and in managing risk.
5. Keep Costs Low
We can’t control the ups and downs of markets. We can control costs, which make a significant difference to what ends up in your pocket. Accepting that the market is largely efficient spares us the effort of trying to outguess it. We are freed up to focus on securing market returns. This in turn helps us to keep costs down, because we are not constantly trading or leaking fees to multiple fund managers, who evidence shows struggle to consistently outperform market benchmarks after fees.
6. Invest Systematically
Systematic investing is a rules-based approach that requires no hunches or speculation. We diversify across asset classes using a framework that sets benchmark weights for each. As markets change and as clients’ needs and circumstances evolve, portfolios are rebalanced to the desired equilibrium. These means we are regularly selling high and buying low. This disciplined approach reduces long- term volatility and contributes more to achieving target portfolio returns and risk management than any other strategy.
Adopting a written investment philosophy such as this sets up formal guardrails in your portfolio to help you avoid speculation and the risk of succumbing to emotional impulses during volatile and highly uncertain periods.
At those times, when the temptation to act recklessly tends to be at its most intense, your adviser can redirect your attention to the principles set out in the investment policy statement: “Remember, we agreed not to attempt to time the market, or second-guess prices, or chase fads. And we settled on this plan because we agreed that this is the one most likely to get you to your goals.”
Summary
Successful long-term investing isn’t easy. That’s because of both the complexity and volatility of markets, together with the emotional impulses that stop people earning the returns they are entitled to.
But with a sound evidence-based investment philosophy, value-added implementation, systematic rebalancing, and an understanding of human nature, we can bring discipline, transparency and consistency to the process.
We can’t tell you what will happen in markets. But we can build a plan to help you deal with what can happen, increasing the likelihood of you achieving your goals and allowing you to live the life you want. That’s a philosophy worth keeping.
Curious about how to proceed? Why not contact Minchin Moore and we’ll match you with an adviser who can show you how to establish an investment philosophy on the way to building a fit-for-purpose strategy to get you to where you want to go.
