Investment Philosophy and Process
Our investment philosophy and portfolio management process are anchored by three foundational tenets – Discipline, Tax-Efficiency, and Cost Control. Experience tells us that we cannot control the daily movements of the market, but we can control these three tenets and, by doing so, strive to have a positive impact on your portfolio. With each investment change we contemplate, we ask ourselves: How will this decision impact our investment philosophy, and are we staying true to our foundational tenets?
We welcome you to our blog on Discipline, the first of a three-part series in which we’ll expand on our investment philosophy and its relevance to you. Future blogs will be written by other members of our investment team and will cover Tax-Efficiency and Cost Control.
Importance of Discipline
During stock market declines, we hear the media, our friends, and our relatives tell us how bad the economy is or how scary the world looks, which ultimately weighs heavily on our emotions. As human beings, our natural inclination is: Do something! Fix the problem! Unfortunately, these tendencies lead many to sell their stock holdings after significant declines have already occurred, claiming they will get back in when the economy looks better or the world seems safer. In effect, they’re saying, “I’m willing to lose money and buy late because I’m scared.” Typically, the market anticipates better times and will move higher well before it actually looks safe to invest again. Resisting the emotion-driven urge to make changes to your portfolio after markets drop is one of the hardest parts of investing.
The primary reason for investment discipline is to eliminate the bad behavior just described. Discipline removes emotion from the decision-making process and replaces it with a rational investment strategy based on fundamentals and sound research. Each year, DALBAR, a Boston-based consulting firm, researches the behavior and investment returns of retail investors. Their findings are quite astounding. Did you know, according to the DALBAR study, that the average investor holds his equity mutual fund just a little over three years1? This is hardly a long-term approach! And consider this: the average investor in stock mutual funds significantly underperforms the market indexes due to bad behavior. The most recent DALBAR report shows that the S&P 500 earned a 9.9% annualized return over the past 20 years, ending December 31, 2014, while the average stock fund investor earned just 5.2%. The reason for this severe underperformance is simple: Investors tend to make poor timing decisions (selling at low prices and buying at high prices). There is also a tendency to chase returns by investing in asset classes that have performed the best most-recently, only to find out that the stellar returns of the past few years are not repeatable in future years.
In our opinion, having a disciplined investment process helps investors avoid the risks associated with bad behavior.
The Disciplines of Our Investment Strategy
- A written Investment Policy Statement (IPS) is created and it encompasses your goals, comfort with risk, cash needs, and investment timeline. The IPS sheds light on the types of investments that may be used in your portfolio and the range of returns you can expect in good markets and bad. The benefit of the IPS is that it establishes disciplined guidelines to help keep you invested during inevitable periods of market turmoil.
- We periodically rebalance portfolios back to the target mix of investments established in the IPS. Rebalancing helps control risk and is a disciplined process of selling high and buying low.
- Our investment committee meets monthly to review the various portfolio strategies and specific investments we’re using. We believe this helps reduce the risk of possibly overreacting to a negative market event which is likely already being reflected in security prices.
- Our portfolios use a disciplined asset allocation process that is focused on controlling downside risk and maintaining certain expectations for fluctuations over various market cycles. Many portfolios contain high-quality bond funds to offset the volatility that is inevitable with investing in the stock market.
- Finally, we strive to be forward-looking with our investment strategy using fundamentals to help reduce the odds that bad behavior takes over.
The services of Payne Wealth Partners and Keystone Financial Consulting are designed to provide clarity, confidence, and peace of mind through a planning-centric solution. Let’s start a conversation about wealth management that’s focused on what’s most important to you.
Published: March 3, 2016
Authored By: Chad A. Sander, CFP®
1Source: DALBAR Quantitative Analysis of Investor Behavior 2015 Advisor EditionThe information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.