My Investment Philosophy

Were I to sum up my entire investment philosophy in one sentence it would go thusly:

Investments are meaningless without the goals that drive them.

This is the one key principle I wish I could somehow stomp into the brains of the people I meet with - Sometimes with a boot. Yet, somehow, the meaning of this phrase escapes the brightest of us when we stare into the harsh reality of the quarterly statement. We get that piece of paper or that email which tells us what we’ve earned or lost and can’t help but feel that somehow we’re missing out on something better. We forget why we’ve been socking away the money in the first place and instead focus on the money itself.

This is typical human behavior. It is unnatural for us to think ahead. How many of us, after all, have a five year plan – much less a 20 or 30 year plan? It’s so much easier to worry about what’s going on today and forget that brief vision we once had – of a comfortable, safe retirement, or a child going to college or whatever it may be.

To use an analogy - it's hard to look forward to Disneyland when we're stuck in the traffic jam on I-10.

This is also why people like Bernie Madoff succeed. They play on these fears and say things like “Well, that’s pretty good, actually, but it’s certainly not the best. I have been consistently getting 400% returns with no negative years! I’d be willing to let you in, though I normally require at least 100,000 dollars to open an account…” The dollar signs seem to be dancing before our very eyes, and goals are pushed aside in the hunt for the quick, easy money.

Similarly, a robust industry springs up around whichever commodity is doing well. Have you heard this phrase: “Send us your gold for cash?” how about this one “There’s never been a better time to invest in…” If we lose track of the reasons why we invest we then start to give in to fear. Doubt creeps in and we wonder “What if that other investment really is better than what I’ve got?” Some financial professionals love this feeling and will try to exploit it - simply asking you to change funds or brokerages. This is the investment equivalent of changing lanes to try to get ahead. What they don't mention is that each time you change lanes it costs you something.

There’s no point in taking on the additional risk of an investment that shoots for a 12% return when a more stable 6% or 8% will be enough to achieve your goals.

The natural question is, “But why not shoot for 12?” Again, ask your retired friends how they feel about their 401k balances lately. Those who were looking for that little extra boost to their income instead experienced a drastic reduction in their money. Those that took the conservative route felt little if any loss at all. I know one doctor who experienced a 6.5% gain in his retirement funds in 2008 because he was invested in that "terrible" investment vehicle - life insurance. Suddenly the "terrible" investment of last year is looking really really smart, (and I give kudos to his planner who had the guts to tell a very wealthy client to go against the flow when the time was right to get conservative).

Does that mean everybody should be jumping on the life insurance bandwagon? Absolutely not.

There is no “best” investment for everyone. The real “best” way is to have customized methods to reach your individual goals on your own time line. It doesn’t matter what you’ve “heard” about this or that investment, or how other people are doing it. What matters is getting to the destination.

We don’t spend hours and hours planning the drive, we spend only as long as it takes to make sure we’ll be able to get there in the way and time we want. To worry about speed limits, guard rails, ice conditions and how fast other drivers will be going is ludicrous until we’re actually on the way. Adjust as needed, but never lose sight of those goals. This attitude will prevent you falling prey to unscrupulous people in the industry and will also reduce some of that ulcer inducing stress than can occur on those bad years.