5 Investment Principles We Believe In
Investments aren’t everything, which is why we provide comprehensive financial planning services at Guide Financial Planning. However, investments are still a key part of most people’s financial plans. How you manage your investments can make a big difference in your quality of life, both now and in the future.
Because of this, we take investing very seriously. We have done a lot of research and have implemented an investment philosophy that is evidence-based and rooted in academic research and market history. Basically, we choose to follow data instead of following our gut. Our premise is that markets act in an efficient manner and when capitalism works over the course of a full business cycle, those who put their money at risk are rewarded. Based on those beliefs and data, these are the five main principles we follow in order to increase the probability of having a successful investing experience for our clients and also with our own personal investments.
Earn Market Returns
When it comes to investments, it seems like everyone is out to “beat the market.” But what is the market, really? The market is the collective knowledge of all investors, the sum of every single “buy or sell” decision made by millions of people worldwide. Most people, even professionals, who try to beat the market do not succeed. The graph below shows that from 2001 to 2020, less than half of all actively managed mutual funds even survived, and only 19% of equity funds and 11% of bond funds successfully beat the market.
Honestly, we don’t think we are smarter or luckier than everyone else in the world. Instead of competing with the masses, we prefer to harness their knowledge and put it to work in our portfolios. We let the market work for us by going with the flow in order to earn market returns instead of trying to defy statistics by beating the market. The truth is, if you look at historical market returns, they are favorable. We just don’t find it worth the risk to try to earn an extra one or two percent.
Along those same lines, we believe strongly in diversification. Buying a full basket of stocks instead of trying to pick a few winners really takes the guesswork out of investing. You never know which markets will outperform from year to year, but a globally diversified portfolio positions you to capture returns wherever they occur. As you can see by the below chart, there is no clear pattern to the top and bottom performers from year to year.
Diversification can also help to smooth the bumpy ride of stock market investing. While the risk of market loss cannot be eliminated, a well-diversified portfolio can provide the opportunity for a more stable outcome than a single security. In a diversified portfolio, there will always be investments going both up and down, but they counterbalance each other for a smoother experience.
Choose a Sustainable Strategy
Picking a strategy that you can stick with is probably the most important thing you can do as an investor. After all, even the most brilliant strategy is useless if you can’t maintain it.
Many people struggle to separate their emotions from investing. Markets go up and down and emotions usually follow them, as seen in the below graphic. Reacting to current market conditions may lead to making poor investment decisions at the worst times. Many investors regret having allowed their emotions to lead them out of the stock market right before an upturn. Missing only a few days of strong market returns can drastically impact overall performance. Even if you don’t make bad decisions, you still don’t want a strategy that leads to excessive stress, worry, or inability to sleep.
We encourage our clients to not only look beyond the headlines and try to manage their emotions but also to be realistic about how much market volatility they can handle. Giving up potential market returns to have a more conservative portfolio is usually worth being able to sleep at night and not fearfully obsessing over your portfolio. You need to choose a strategy that you won’t deviate from, even if we have a repeat of March 2020.
Keep Costs Low
To cover their expenses, mutual funds and ETFs charge investors fees as a percentage of their investment. Fees range everywhere from fractions of a percent to over two percent. Because fees are charged on an ongoing basis, they can really eat into returns over time. The SEC provides the following illustration showing the effects of three different fee levels on an investment over time:
As you can see, a difference in fees of 0.75% can equate to a difference in return of nearly $30,000 over 20 years. The effects of fees compound over time, so we recommend keeping costs low and that is what we do for our clients for whom we manage money.
Overweight Potential Market Premiums
While the market is generally efficient, there are some areas where you can get an edge. Small cap stocks have outperformed the market over long periods of time as have value stocks. We take this into account when we design our client portfolios. That doesn’t mean that we only invest in small cap and value stocks, rather we tilt our portfolios in that direction while maintaining solid diversification.
Money Isn’t The Most Important Investment
The investing principles outlined above are important, as are maximizing tax efficiency and regular rebalancing. However, another principle we at Guide Financial Planning view as even more significant is that money isn’t the most important investment. Investing in your relationship with God and his call on your life and investing in your marriage, family, and other relationships are the most important investments you will make. Your financial investments should be something that supports and enables those other investments.
How are you doing with your investments? Do you think your portfolio would benefit from applying some of our principles? Or would you like help with your financial investments so that you have more time for investments in relationships or God’s call? If you would like professional help and the principles that we follow resonate with you, schedule a free introductory call today.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.