How to Create Your Investment Philosophy

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1,”. That’s one of the investment philosophies of Warren Buffett, the greatest investor of all time who needs no introduction. Do you invest? If yes, do you have an investment philosophy?

What is Investment Philosophy?

An investment philosophy is a specific investing style. The successful investors create an investment philosophy to govern their decisions on investing.

An investor may concentrate his investment on:

  • businesses with strong income opportunities, or
  • look for undervalued stocks, or
  • organizations that generate consumption-intensive stuff (growth markets).

Do not confuse investment philosophy with the investment strategy. When we put our investment philosophy into action, this is our investment strategy. If a strategy no longer generates a profit, refer to our investment philosophy to find a new strategy.

Why is it important to define your Investment Philosophy?

If you do not define your own investment philosophy, you’re likely to:

  • switch strategies,
  • constantly change your portfolios and
  • eventually, pay more for expenses and taxes.

Basically, you have no directions in your investments.

During good times, everyone earns money regardless of investment philosophy. Your investment philosophy will only be truly tested when things don’t go as planned. For example during a recession or bearish market.

The market is full of buzz with loads of information coming from all corners. To cut through all these noises, successful investors acknowledge the importance of having an investment philosophy to keep them concentrated on the essentials, especially during tough market conditions. Your investment philosophy is the pillar where you built upon your strategies.

Some examples of Investment Philosophy

1. Value Investing

Making money by buying undervalued securities. Many successful investors, such as Warren Buffet and Peter Lynch, are proponents of value investing.

2. Growth Investing

Concentrating on firms that demonstrate signs of above-average growth, even if the value of their stocks seems highly costly in the price to book ratio.

3. Socially Responsible Investing

Focused on investing in companies that uphold a set of moral/ethical principles, like better fuel efficiency, no cruelty to animals, reasonable salaries, etc.

4. Fundamental investment:

Look at growth, income, management team and the capital structure of a company before deciding whether to buy its shares. In other words, concentrating on companies with promising profitability.

Steps to take to create your Investment Philosophy

So, how do you create or define your own investment philosophy? By answering the following series of sample questions on your personal attributes, financial position and your views on the market, you could then begin to see what investment philosophy that fit you.

1. Understand your own personal characteristics

  • Are you a patient person?

Most investments schemes need a lot of patience, which is something that many of us do not have. If you are impatient, you should consider a philosophy of investing which will pay off quickly.

  • Are you a high, medium or risk-averse person?

If you dislike taking risks, embracing a plan that involves a large amount of risk will not be a suitable strategy for you in the long-run.

  • How much time are you willing to spend on investing activities?

Different investment strategies require different time and resource. Some demand more attention. In general, short-term investing strategies are more time-intensive than long-term buying and selling and retaining strategies.

  • What is your age?

As you get older, you will not take risks willingly, in particular with your pension money. Past experiences in investing would also limit your philosophy and choice.

  • Are you an Individual or Group Thinker?

Certain strategies for investment requires you to follow the herd and some the opposite. Which is more appropriate for you can depend more on whether you are comfortable with conventional thinking, or are you a loner?

2. Understand your financial situation

Your investment philosophy preference is also influenced by your financial characteristics, such as your employment stability, the funds available for investment, cash requirements, and tax status.

  • What do you think of your employment status, now and future?

Your investment philosophy will be strongly affected by what your perceived earning capability. If you believe you can earn high income with plenty of balance to spare, you have far more degrees of liberty in choosing your investment philosophy. If it is the opposite, your investment strategy needs to be adjusted to accommodate your cash requirements.

  • How much funds you have for investment?

As the financial resources at your disposal rise, your investment philosophy options expand.

  • What are your requirements for cash?

Unforeseeable requirements for cash is a threat. This is due to personal crisis such as an illness not fully covered by insurance or unforeseen loss of revenue.

Nevertheless, you could still include the cash requirements probabilities into your investment philosophy. .The anticipated need for money reduces your investment time horizon and may eventually require you to embrace a short term pay-off investment philosophy.

  • What is your tax status?

Investors facing heavy income taxes should opt for investment plans that decrease or delayed taxes into the future.

3. What are your views on the market?

Your opinions on how the market conduct itself and the results of your investment approaches will certainly change as time goes by. But for now, just make your decisions based on what you know currently.

Though consistency in applying your investment philosophy is important to your investing success, it would be insane to continue if evidence kept surfacing proving against the philosophy.

YOUR Investment Philosophy

So, by now, do you have an idea of your right investment philosophy? I bet you do. Your philosophy can be either just ONE single strategy that best suited you or a mix of strategies.

Working with a Financial Advisor

It’s also best to work with a financial advisor while answering these questions or share the answers. Acting also as a coach, a  good and trusted financial advisor, will be willing to educate and advise you. He/She could help to identify which philosophy that snug in perfectly with your investing profile.

Conclusion

Picking the right philosophy is absolutely critical for successful investing. However, to make the decision to pick which philosophy, you must look within yourself first before considering the external factors. The best philosophy is one that fits your character and needs.

So, what do you think is the best investment philosophy that suit you?

Eric Kiang
Connect

Eric Kiang

Writer at MyPF
Eric is a qualified chartered accountant since 1992 and a member of Malaysian Institute of Accountants (MIA). He received his Diploma in Financial Accounting from TAR College and subsequently professional accountancy from ACCA.

He has 25 years working experience in different finance-related jobs. He is now a consultant, and personal finance and business writer. His main goal is to help and educate non-finance professionals to understand and solve their personal finances problems. He believes everyone should be financially literate because everything we do has money implications!

Eric currently resides in Kuala Lumpur, Malaysia with his wife and two young children.
Eric Kiang
Connect

Leave a Reply