The Importance of a Strong Investment Philosophy

The Impact of a Strong Investment Philosophy On Our Investment Management Process

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I think most of us have some sort of moral compass guiding us through life, right? And we make our decisions based on what feels right according to that inner code. Not only that, but we normally carry out most of our day-to-day tasks with some sort of methodical approach. You may not even be aware of it because it’s so deeply programmed in. And it’s the same with us at Align and our investment philosophy.

To be frank, only a fool would rush into investing with no guiding principles and no method. And besides, we expect to be held accountable for all the advice we give to our clients. So we need to be able to explain how our investment philosophy impacts the approaches we take and why we take them. Our philosophy works as a guide for our investment management process.

After many years of watching stock brokers sell their clients investments that don’t align with their clients actual financial priorities; we created a personalized, four-step investment management process that is objective, evidence based and quite simply, it just makes sense.

We outline our investment philosophy in our FAQs (and detail our investment management process further here):

We believe in a simple, but sophisticated and disciplined approach to managing our clients’ investments. It is important to us that our clients should understand their investments, and the process we use to select and manage your portfolio should be consistent.

In order to do this, we’ve created an evidence-based approach to the steps in our investment management process; including – goals-based risk assessment, strategic asset allocation, manager selection and rebalancing. Most importantly, we do not try to time the market.

However, we fully understand that not every investor will have a firm understanding of what those financial concepts mean. We thought we’d take some time to simplify it all a little.

How We Manage Your Money in Four Steps

Step #1: Understand Your Risks and Your Priorities Through a Goals-Based Risk Assessment

If we’re going to really break it down, there’s two concepts at play here. There’s goals-based investing, as well as risk assessments that are key to any investment strategy.

When we talk about goals-based investing, this is probably one of the key concepts to Align’s entire approach. This is the idea that we empower you to use your money to meet your life goals, rather than endlessly (and we think a little needlessly) pursuing higher and higher returns and risk on your investments.

We help you to identify some key financial priorities or goals, and to implement a financial plan that enables you to achieve those life goals while spending your money in alignment with your values. And this, we believe, leads to a greater sense of wellbeing, purpose and achievement.
This is about assessing not just market risk, but the other risks in your life.

For example, if your income is variable and you don’t have a large emergency account set aside for the lean times, we may take less risk in your investment portfolio. We might do this even if you’ve stated you are comfortable with investment risk.

Or on the flip side, if we find you have saved plenty for retirement and you will likely have a wealth surplus, we might let you know that your investments could have less risk (if you wanted). We could reduce risk and you would still achieve your goals to pass on a legacy or replace your income in retirement.

When we talk about risk assessment, that’s the process of taking a full analysis of the resilience of your financial picture. We do that to understand the strength of your portfolio against potential events that might alter the value of your investments. But we frame that around your goals, and your risk of losing out on rather than achieving those goals.

This is where we get personal to you and customize your investments to match your priorities and your financial situation.

Step #2: Set Your Strategic Asset Allocation

Oh, this one sounds like real financial jargon, doesn’t it? And it sounds impressive – it sounds strong. But what does it mean?

Strategic asset allocation is a specific approach to investing that focuses on the diversification of a portfolio, to generate an appropriate rate of return at a given level of risk. Asset class allocations will be chosen and then rebalanced regularly across the portfolio.

First though – what’s an asset class? An asset class is just simply a type of asset, and there’s some level of agreement among financial professionals that five main classes exist. These are:

  • Stocks and equities
  • Bonds and other fixed-income investments
  • Cash or cash equivalents
  • Real estate and other tangible assets
  • Futures and other financial derivatives

But wait, how do we decide what your allocation should be? Great question! Much like our belief that we can’t consistently time the market, we don’t think anyone else can do it either. So our strategic allocation is created by the average of three to four major institutions’ annual guidance.

We trust firms like Vanguard, JP Morgan and Morningstar to give us their opinions on the right mix and then we take an average to inform our allocation for each of our model portfolios for the year.

So what’s the takeaway here? We take an unbiased view of rebalancing and do it every year like clockwork and, crucially, without emotion. We do not believe you can time the market.

Step #3: Manager Selection

So how do we fill those five buckets? Who decides which stocks or bonds we own? Here’s the bottom line: we only buy investments we can understand.

We use time-tested, trustworthy managers that have proven to be good stewards of capital, and who actually own the portfolios they are managing. We also look for firms who put the right incentives in place for their Portfolio Managers, so they can focus on long term results and aren’t incented to take unnecessary risks for potential short term reward.

We go to great lengths to ensure that we are working with the right investment managers, and this involves thorough investigation and analysis of prospective managers, as well as rigorous ongoing observations. We have checklists we go through every quarter to be sure our managers are doing what we hired them to do.

Investment manager selection involves both quantitative investigations (evaluating the numbers in their performance track record) and qualitative investigations (looking thoroughly at their processes, their personnel and their own philosophies). Investment managers should have a robust track record, and a consistent approach, so that we can be confident in how their strategies may play out.

It’s also reassuring to understand that an investment manager has similar priorities at the heart of their strategies. This means, for example, understanding the role that ESG (Environmental and Social Governance) plays in their plans.

Step #4: Monitor and Rebalance

A good plan is like a GPS because it tells us when we’re off course. And as an investment portfolio grows, certain assets might grow faster than others and can begin to increase the risk of the portfolio.

Rebalancing your account sells from the assets that have grown faster and buys the assets that are attractive. But how much is enough?

According to Vanguard’s research, more activity in your account doesn’t actually result in better risk adjusted returns. And it often results in higher taxes. That’s why we rebalance all our portfolios every year, favoring discipline over frequent trading and the illusion of market time.

Every year, currently in the first quarter, we’ll look at the assets that you hold in your portfolio. For example, you might be in a position to have 50% of your assets as stocks, 40% in fixed-income bonds, and 10% in cash. At the end of the year, your stocks might have outperformed your bonds, and your portfolio might be allocated differently. You may have 60% of your assets now in stock, 35% in bonds and 5% in cash.

As part of a strategic asset allocation approach, we would then rebalance your portfolio. We’d sell some of your stocks and redistribute the gains by equally adding to both your bonds and your cash. Then your portfolio, having increased in value, would be once again rebalanced at 50% in stocks, 40% in fixed-income bonds and 10% in cash. (There’s a great, simple demonstration of how this works here.)

This is what’s known as a contrarian approach to investing, because it sells high and buys low automatically. We particularly like this approach because it takes the irrational impulses out of investing, keeping everything feeling quite level-headed. There isn’t the temptation to pile more assets into well-performing areas, only to be hit hard if the market trends change suddenly.

And that’s it. Our four step process to aligning your money with your life. We think everyone should feel good about your money and investing.

Our Guiding Investment Philosophy: We Don’t Time the Market

Some people think they know the tricks of the market. They’ll try to persuade you that they know what’s going to happen, basically. But the simple fact is that it is not possible to time the market. You can’t run your investment philosophy on the basis that you own when stocks are high and valuable, and sell right before a crash occurs.

If you worry about buying valuable stocks, then you might have bought at their peak and then the only way is down. If you buy when stocks are undervalued you might find, but there’s absolutely no guarantee, that the only way for those stocks is up. But there is no way to tell until way after the event if a stock has reached its peak or dipped to its lowest value.

Timing the market is not an investment philosophy, it’s a scam. It’s filled with uncertainty. It’s also driven by impulse and emotion, and it can be very costly if you end up with multiple transaction fees as well as potential losses. The buy-and-hold approach can feel slower at times, but is generally speaking far more advisable. Research shows, in fact, that buy-and-hold investments outperform any attempts to try and time the market.

A Disciplined Investment Philosophy

At Align Financial, we favor a strategy centered on discipline and low costs, not a trading scheme almost guaranteed to lose you money eventually. It doesn’t sizzle, but it works. And when it comes to your life savings, we’d rather hit a lot of singles and doubles, rather than going for a homerun and striking out entirely.

We aim to keep things simple but well thought out and, at all times, evidence based. We regularly monitor our investment managers, the markets, our strategic asset allocations as well as making sure we know and understand you, your priorities and your personal financial situation.

This means we are always engaged in making sure we are offering you the most appropriate and beneficial advice, to help you make the most of your money. If you would like to understand more about our investment approach or to find out if we can help you manage your money to meet your goals, please reach out. We’ll be delighted to have a chat.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations.

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Tanya Nichols, CFP®
Tanya Nichols is a fee-based CERTIFIED FINANCIAL PLANNER™ professional located in Duluth, MN and serving clients across the country. Align Financial takes a simple but deeply impactful approach to wealth management, connecting your money to your life in a way that feels right to you.

Because Align Financial is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions. Read our full disclosure here.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S.