The Landmark Financial Management Investment Philosophy
Our wealth management approach encompasses much more than simply managing investment portfolios. It involves developing, implementing and reviewing a comprehensive strategy to create, protect, preserve and enjoy wealth.
Having said this – investing intelligently certainly does matter. An excellent strategy can quickly be undone by poor investment decisions.
It is because investing wisely is so important that we have thought long and hard about how we approach it. Our ideas have been fed by reams of academic research as well as practical lessons learned from working with clients over many years.
As a result of these deliberations, we have developed a comprehensive Investment Philosophy which we diligently apply to each of our clients. This gives you the peace of mind that comes from knowing what we do, why we do it and that we will be consistent in our approach when it comes to managing your investments.
We Focus on What’s Important – to you and to investing
Our Investment Philosophy has one simple aim – to provide our clients with the highest probability of achieving the financial goals that are important to them.
Our approach is centred on Proven Investment Principles that make a real difference and that investors can control. We do not waste our time or your time and resources on areas that are not important or are out of our control.
Principle 1. Financial success is driven by the behaviour of investors not the performance of investments
The single biggest factor that prevents investors from enjoying the long-term returns delivered over time by a well-structured portfolio is their own behaviour. We actively work with clients to help them avoid making common mistakes such as:
- Buying in when markets rise and selling out when they fall
- Chasing past “winners”
- Getting bored – constantly meddling with portfolios to add something “different”.
Principle 2. Markets Reward Investors and Punish Speculators.
Trying to generate returns by “picking investment winners” is nearly always a recipe for failure. The possibility that any single individual can consistently form a better view about the price of an asset than everyone else in the market with the same information is extraordinarily unlikely.
The capitalist system is centred on delivering returns to investors via investment markets over time. You are entitled to your share of this long-term return, and the surest way to achieve it is to be a patient, long-term investor.
Principle 3. Asset Allocation Drives Performance
Academic studies have shown that over 90% of the difference in returns across well diversified portfolios is explained by their asset allocation. Hence, the focus should be on determining the right asset allocation to achieve an investor’s goals, not individual assets.
By definition, in a Capitalist System, equities should and do provide the highest returns over time. The degree to which you diversify away from equities is driven by 2 factors:
(i). your tolerance of volatility
(ii). your time horizon (how long you are investing for)
That means, by understanding how long you are investing your money for and your tolerance for volatility in the short-term, we can allocate your investment among assets that give you the highest probability of achieving the goals that are important to you.
Principle 4. Risk is Real – but it Can Be Managed
The only way to seek higher than market returns is to take on more risk. But greater risk does not mean greater returns to you, it means potentially better or potentially worse. The key to wise investing is understanding those risks, managing the ones that are worth taking and avoiding the ones that aren’t.
Principle 5. Avoid Capital Loss by Broad Diversification
The most important risk to manage is the risk of permanent capital loss. Once your capital has been lost, it is gone forever. The best way to reduce the risk of capital loss is diversification, i.e. spreading your investments across a large number of assets. We strongly advocate broadly diversifying portfolios across assets, asset classes, countries and managers to significantly reduce the risk of permanent capital loss.
Principle 6. Balance Long-term Risk and Short-term Risk
All investors must find a balance between two competing risks – Short-term (Volatility) and Long-term (Inflation).
The main risk of volatility is that the price of an investment may fall in the short-term. This risk only really matters if you intend to sell your asset in the short-term – otherwise it is only a paper movement. Inflation is the long-term risk that the purchasing power of your assets does not grow fast enough compared to rises in the cost of living. If your investments do not grow faster than inflation, they are actually standing still (or going backwards) in real terms.
The Time Horizon is the key consideration for investors in balancing between inflation risk and volatility risk. If assets are only to be held for a short time, then the key risk is volatility and this can be avoided by investing more in stable assets like cash. If assets are to be held for a long time, then inflation is the greater risk and your investments should be more in growth assets like equities.
Principle 7. Don’t Forget Liquidity and Other Risks
There are a range of other risks that can apply to investments and which need to be considered such as currency risk, counterparty risk and interest rate risk.
One of the most important of these risks is Liquidity Risk. The ability to realise your assets quickly when you want is a valuable thing. Often, apparently stable assets only appear so due to a lack of liquidity and irregular valuation. In times of stress when these assets need to be realised, the real price can often be much lower or worse, the asset simply cannot be sold. In this sense, volatility can be seen as the price that you will pay for liquidity.
Illiquid assets should only be invested in where they offer a justifiably greater return than liquid alternatives.
Principle 8. Investment Management is a Full-Time Job
It is highly unlikely that any individual investor can consistently make better investment decisions than full-time investment managers with significant research and resources. Using Professional Investment Managers has a number of benefits including:
- much greater diversification than can usually be managed by individuals
- ensuring investment decisions are made objectively
- reducing the key person risk in having just one individual, such as a broker or adviser, make key decisions and deliver important advice
- facilitating important strategies such as rebalancing and dollar cost averaging.
Principle 9. Regular Rebalancing and Dollar Cost Averaging
Regular Rebalancing and Dollar Cost Averaging are powerful strategies that help achieve more consistent returns in a disciplined way. Together, they can increase returns and reduce risk by helping you consistently “buy low” and “sell high”
Regularly rebalancing involves consistently taking some profits from parts of your portfolio that have outperformed, and reinvesting those into other parts that represent greater value to maintain your agreed asset allocation. The key issue with rebalancing is to do this regularly and efficiently in a way that minimizes expenses from taxes and transaction costs.
Dollar Cost Averaging involves investing the same dollar amount at regular intervals over time. By doing this, you automatically buy more when assets are cheap and less when assets are expensive.
Principle 10. Keep Expenses and Taxes in Mind – and in Perspective
Expenses and Taxes can reduce your overall return – so it makes sense to keep these in mind when implementing your portfolio. You can incur excessive costs and taxes in many ways, such as trading too frequently. Conversely, investors who aim to avoid costs by doing everything themselves can suffer from issues such as lack of diversification, lack of up-to-date information, lack of time, administration and excess accounting costs.
The key is to keep a sense of perspective. Some level of tax is the price you pay for good investment returns. Similarly, professional managers that charge reasonable fees to provide benefits such as broad diversification, up-to-date information and full-time investment management can be a good investment.
If our Investment Philosophy makes sense and you would like to schedule an appointment with us to talk about your personal situation, please contact us.