In that spirit, here are some of my core investment values that I’ve developed over the years.
Financial markets are complex systems, but they don’t necessarily require complex solutions.
Good investing is boring. Although more complicated strategies could possibly prove correct, the simplest solution usually makes for the best answer in a system characterized as much by uncertainty (which can’t be modeled) as risk (which is the basis for most standard finance models).
There is no such thing as the perfect portfolio.
Building too much precision into models assumes that market returns follow a normal distribution and that correlations are static – neither of which is true. Similarly, frequent changes to asset class weights or the underlying investments creates an illusion of control that doesn’t exist and represents overconfidence on the part of the investor. If there is a perfect portfolio, it’s the one you can stick with through thick and thin.
Time is more important than timing in investment success.
Investment decisions should be made within the context of a multi-decade time horizon and not current market conditions. The long-term feels like an eternity to live through in real time. The key is to build a portfolio that accepts (not predicts) the regular downturns that come with investing. The basic pieces of financial theory may appear broken over any given market cycle, but they tend to shine bright when you allow them enough time to work.
Investment behavior plays a key role in outcomes.
A quality decision-making process should protect us from our faulty mental hardwiring that causes us to misinterpret (or ignore entirely) probabilities, find patterns where none exist, and elicit emotional responses that were useful from an evolutionary perspective but detrimental to good investing. An advisor equipped with a sound process can act as a behavioral babysitter to ensure their clients capture the market’s returns.
Focus on what you can control.
Costs, asset allocation, investment exposures, investor behavior, taxes, savings…these are areas in which we can actively improve outcomes. They deserve substantially more attention than attempting to predict the future or outsmart the market.
