Investment Philosophy, Part 1

Full Transcript:

Investments are a key component of anyone’s financial plan. Having a sound investment philosophy could be the difference between achieving your goals or missing them.

Today, we’re going to discuss the investment philosophy that I designed for New Heights Planning. It is an evidence-based investment philosophy that is built on six key principles. Today we’ll touch on part one, which are the first three principles. We’ll discuss why it’s time in the market that matters, How to set your asset allocation, and why you should strive for average market returns.

Principle number one: It’s time in the market that matters, not timing the market. You have control of two items that will have the largest impact on the ultimate size of your portfolio, how much you invest and how long that money is invested. If you try to time the market, you’re trying to sell at the highs and buy at the lows. Nobody can accurately and consistently predict the peaks and troughs of the stock market. When you try to time the market, you’re moving away from investing and moving towards speculation. And trying to get lucky is not a good strategy for anybody’s nest egg.

I really like the graphic below because it shows how a $1 investment in 1970 would have been worth $80 at the year-end of 2022. Now, during this time period, that money was invested. There was the COVID-19 pandemic, the great financial crisis, and many other significant bear markets. By staying invested throughout that entire time, your $1 would have increased 80-fold.

Principle number two: Your asset allocation is the biggest driver for your rate of return. Now, when we’re talking about asset allocation, we’ll stay at a very high level and talk about stocks versus bonds. Stocks generally have a higher expected rate of return, but are also more volatile

or have more risk. Bonds, on the other hand, have a lower expected rate of return, but are also less volatile. They have less risk.

When determining how much stocks versus bonds you should have in your investment portfolio. You should consider three factors. One, How much risk do you need to take on to meet your goals? Two, What is your financial capacity to handle that risk? And three, what is your individual risk tolerance? Stocks should be the primary growth engine for your portfolio, and bonds will be the shock absorbers. The higher percentage you have in stocks, the higher expected rate of return, but the bumpier the ride.

Principle number three: Strive for average market returns. First, let’s talk about what we mean by the market. When people talk about the stock market, a lot of times they’re referring to the S&P 500, the 500 largest U.S. companies. Now, if you invest only in the S&P 500, you’re not investing in smaller companies, and you’re not investing in companies that are based overseas. At New Heights Planning, many of our portfolios have upwards of 10,000 companies in them so that our clients are invested in the highest-performing companies and sectors, regardless of where they are in any given year.

Also, at New Heights Planning, we believe that the markets are efficient, meaning all available information is priced in, and therefore, the markets are forward-looking. Time and time again, research shows us that trying to actively beat the stock market will statistically get you subpar returns.

This concludes part one. Stay tuned for part two, where we talk about the next three principles of New Heights Planning’s investment philosophy.