A Little Clarity
Developing your investment philosophy
By John Sammut and RBC Wealth Management
Like a mission statement, a clear investment philosophy is a foundation of core beliefs to guide an investor during any market environment. Clarifying your investment philosophy provides perspective and insight that can help you make better decisions and exercise sound judgment, especially when times get tough. As an example, here is a review of the core beliefs which are the basis of our process and strategy.
The fundamental investment risk is not losing one’s money, but outliving it
Most people are looking at upwards of 30 years of retirement. Even with a relatively modest inflation rate over the past 30 years, consumer prices have more than tripled. So the risk to the long-term investor isn’t loss of principal, it’s the extinction of purchasing power. Therefore, the investor’s objective (and greatest challenge) is to protect the purchasing power of their assets over long periods of time.
Expect financial storms
As Sir John Templeton once said, “It is only common sense to prepare for a bear market.” Common sense investing means that one should prepare both financially and psychologically. Financially, one should be prepared to live through any bear market without being forced to sell assets at an inopportune time or price. Psychologically, to buy low and sell high is difficult for persons who are not mentally ready to act when the time is right.
Consensus views are rarely helpful in guiding an investor’s future actions
We believe in a contrarian approach. The broader investing populace is rarely correct, and often the best investment decisions are those that are contrary to the popular opinion. A non-consensus idea will often lead to a successful investment outcome if given enough time. No investment fact is more difficult to learn than the fact that the price of shares is never low except when most people are selling and never high except when most are buying.
Transparency and liquidity are essential
The Bernard Madoff saga illustrates the importance of due diligence and the dangers of not knowing exactly what is inside your portfolio. We believe that the most transparent, logical and effective way to implement an intelligently diversified portfolio is to utilize a core index approach using select index-linked Exchange-Traded Funds (ETFs). These instruments provide relatively low-cost, liquid exposure to various asset classes and provide an exceptionally efficient vehicle to implement a well-diversified investment strategy. Importantly, their component holdings can be monitored daily to help avoid unpleasant surprises.
Don’t panic
Anyone can feel panicky during periods of turmoil, or euphoric during times of jubilation. That said, emotional decisions are dangerous and detrimental to long-term financial success. To be a successful investor, one needs to understand human psychology and counteract emotional reactions with a rational discipline. A good rule of thumb is to sell during times of market hysteria and buy during times of panic. To buy low and sell high sounds so simple, but in reality is an extraordinary challenge.
John Sammut helps individual investors, families and corporations protect their purchasing power and improve investment results. You can reach Sammut by telephone at (800) 343-3036, or visit him at johnmsammut.com.
This article is provided by John Sammut, a financial consultant with RBC Wealth Management in Syracuse, NY, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.
RBC Wealth Management, a division of RBC Capital Markets Corporation, Member NYSE/FINRA/SIPC
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