I Need an Investment Philosophy

investment policy statement philosophy

Question:  I have a retirement plan, but have been amiss in developing an investment philosophy.  Can you help?

Answer:  As a long-term investor with a retirement plan account and no investment philosophy, you may not be as successful as you want to be.  In the November 2015 issue of “AAII Journal” Ben Carlson, CFA, gives advice on how you can define your own investment philosophy.  In a sidebar, he offers 10 questions to help you figure it out.  I am going to repeat those questions here, with what I think your answers should be for your retirement savings.

Q. What are your core investment beliefs?

A. My investment time horizon is the rest of my life. I will invest with that time period in mind.  I will diversify to reduce risk. I must always remember that I can’t predict future interest rates or inflation or short-term stock market movements. I can’t consistently predict superior performing stocks, and I can’t accurately time the stock market.

Q. Do you understand your philosophy and why you believe it?

A. Yes, I do, and I believe it because it is backed by sound academic research.

Q. Do you know the potential risks?

A. Yes, I know that investments go up and they go down and that sometimes they go down a lot like they did in the bear markets in 1987, 2000-2002, and 2007-2008.  But if I stick to my plan, my portfolio will grow.

Q. Does it suit your personality and individual circumstances?

A. Yes, because I have built my portfolio to provide me with a target rate of return and I have conditioned myself to manage my expectations.

Q. Will your philosophy help you follow your strategy?

A. My philosophy has allowed me to develop a strategic plan that is sound and is one that I believe in and will stick with.

Q. What constraints will you need to turn your philosophy into a portfolio?

A. I will invest only in securities that I understand and I will allow only a certain percentage of my portfolio to be in any one asset class.

Q. What will you own and why?

A. I will own low-cost mutual funds or exchange-traded funds that allow me to diversify into my chosen asset classes, which include U.S. stocks, International stocks, bonds, possibly some alternatives like a commodity and/or natural resources index and real estate securities.

Q. What will cause you to buy and sell?

A. I will maintain a balanced portfolio.  When one asset class, say, for example, U.S. large company stocks grows and another one goes down, I will keep the portfolio allocation balanced with my annual cash contributions.

Q. What will cause you to make changes to your portfolio over time?

A. If my life style changes, say, for example, when I retire, I will re-evaluate my financial position and possibly change my portfolio allocations.

Q. What types of investments or strategies will you avoid?

A. I won’t speculate, I won’t bet on changes in interest rates, I won’t time the market, and I won’t pay any attention to the day-to-day market noise promulgated by the live and print news media.


Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.