choosing your investment philosophy
DESCRIPTION
Many investors find themselves trapped in a perplexing cycle of underperformance and missed expectations from their investments. Choosing your investment philosophy is the missing link that can offer long-term peace of mind.TRANSCRIPT
© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.
CHOOSINGCHOOSINGYOUR INVESTMENT YOUR INVESTMENT
PHILOSOPHYPHILOSOPHY
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
Have you ever worried about: Getting high enough returns on your
investments? Maintaining your standard of living at retirement? Affording high quality education for your
children? The next market crash? The next market boom? Missing out on the latest, greatest stock tip? Making sense of all of the information available? Someone else having a better portfolio? Not having enough money to care for loved ones? Getting bad advice and, worse yet, paying for it? Buying high and selling low?
ARE YOU CAUGHT INTHE INVESTORS’ DILEMMA?
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
7Performance
Losses
1Fear ofThe
Future
2Forecas
tand
Predict
3Track-RecordInvestin
g
4Information
Overload
6Breaking the Rules
5Emotion
-Based
Decisions
NOT NOT ENOUGH ENOUGH MONEYMONEY
NONOPEACE PEACE
OF MINDOF MIND
THE INVESTORS’ DILEMMA
Definition
Investors’ Dilemma: A cycle explaining the human side of investing.
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
UNDERSTANDING THE INVESTORS’ DILEMMA
1. Fear of the Future2. Forecast and Predict3. Track-Record
Investing4. Information Overload5. Emotion-Based
Decisions6. Breaking the Rules7. Performance Losses
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
• How does this dilemma affect you?• Describe how the Investors’ Dilemma has
affected your investment portfolio.
THE RESULT: NOT ENOUGH MONEY
© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.
THREE PRINCIPLESTHREE PRINCIPLESOF INVESTMENT OF INVESTMENT
PHILOSOPHYPHILOSOPHYDefinitions
Philosophy: Theory of the principles underlying thought, knowledge, and conduct.
Principle: A fundamental truth, law, or motivating force.
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
THREE PRINCIPLES
PRINCIPLE 2Your Market Belief+
=Your Personal Investment Philosophy
PRINCIPLE 1Your True Purpose for Money
PRINCIPLE 3Your Investment Strategy
+
A statement of the most important value that you want to express
through the way you use money.
Identifying exactly what you believe about how the market works.
The method you want to utilize asyou create an investment portfolio
for the future.
Your guide for all future investing decision.
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
True Purpose for Money is a statement of the most important personal value you want to
express by the way you utilize money.
PRINCIPLE 1True Purpose for Money
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
PRINCIPLE 2Market Belief
Definitions
Belief: A state of mind in which trust or confidence is placed.
Market:The buying, selling, and trading of all goods, stocks, and
services.
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
Two Views of Markets
TWO VIEWS OF MARKETS
Random price movements Predictable price movements
MARKETS WORKThe Markets Work hypothesis sees the market as random and unpredictable. Amazingly, the randomness of the market actually indicates that prices quickly and accurately reflect information.
MARKETS FAILThe Markets Fail premise presumes that prices react to information slowly enough to allow some individuals to analyze and predict the future.
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
MARKETS WORK MARKETS FAIL
•What does it mean?•What’s the story?
•Is there proof?
EXAMINING MARKET BELIEFS
Random price movements Predictable price movements
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It is time to make a choice. What makes most sense to you?
WHAT DO YOU THINK?
MARKETS WORK MARKETS FAIL
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PRINCIPLE 3Investment Strategy
TWO STRATEGIES FOR INVESTING
Structured Funds Speculative Funds
ASSET CLASS INVESTING SPECULATIVE INVESTING
MARKETS WORK MARKETS FAIL
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Market ReturnsAsset AllocationLifelong Investing
Stock SelectionTrack-Record
InvestingMarket Timing
EXAMINING INVESTMENT STRATEGIES
MARKETS WORK MARKETS FAIL
ASSET CLASS INVESTING SPECULATIVE INVESTING
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BELIEF: MARKETS WORKSTRATEGY: ASSET CLASS INVESTING
“In short, asset class investing is consistent with what we know about how free and fair markets function. Active management is not. Asset class investing is supported by the results of scores of empirical studies of fifty years of professionally managed portfolios. Active management is not. Finally, asset class investing allows reliable planning and implementations of portfolio strategies. It is demonstrably successful and the most prudent way to invest money.”
─ Rex Sinquefield, Dimensional Fund Advisors Debate with Donald Yacktman, 1995
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BELIEF: MARKETS FAILSTRATEGY: SPECULATIVE INVESTING
“Finding the truth is critical because analyzing mistakes is fundamental to growth in all life’s challenges. In the markets, moreover, you can be right for the wrong reasons, and wrong even though you made a great odds-on investment. The reason is subtle, but simple: The markets are not consistently objective. At times, they are emotional, subjective, and psychological.”
— Victor Sperandeo, Active Manager, Author Trader Vic II--Principles of Professional Speculation
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
ALIGNING YOUR STRATEGY WITH YOUR BELIEF
Markets Work/Asset Class Investing
Align:When you think that markets reflect all knowable and predictable information in current prices, then the best approach is to diversify, allocate assets, and invest for a lifetime. There is no need to be concerned with short-term, get-rich-quick schemes. You can disregard media hype and continuous stock market updates, knowing that with a buy and hold strategy, you will have the money you need to reach your goals.
Confidence, Peace of Mind
Markets Work/Speculative Investing
Conflict:If you believe that markets set prices accurately, then attempting to pick stocks, time the market, or utilize track-record investing doesn’t make sense. You are going against your inherent trust in market efficiency when you try to take advantage of it for short-term results.
Confusion, Anxiety
Markets Fail/Asset Class Investing
Conflict:If you believe that it is possible to identify mispricings in advance, then utilizing diversification and asset allocation over the long-term is inappropriate. Believing that markets fail to set prices accurately, it follows that you would want to stay connected to short-term market fluctuations and analyze information so that you can take advantage of the inefficiencies in the market.
Despair, Resentment
Markets Fail/Speculative Investing
Align:If you presume that inefficiencies exist in the market, then you are practically compelled to apply speculative techniques to discover them. This means that you find a way to stay plugged into market analysis and learn about how to take advantage of the current mispricings in order to make money and decrease risk.
Sense of Power, Control
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
BRINGING IT ALL TOGETHER
PRINCIPLE 2Your Market Belief+
=Your Personal Investment Philosophy
PRINCIPLE 1Your True Purpose for Money
PRINCIPLE 3Your Investment Strategy
+
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
• Eliminate speculative investment techniques
• Work with a financial professional who believes that markets work, offers asset class investing, and provides education, discipline and coaching
• Ignore media hype• Set lifelong financial goals that help you
to realize your True Purpose for Money• Focus on capturing market returns• Utilize asset-class or structured funds• Diversify prudently• Identify your risk tolerance
• Pursue speculative techniques to capture inefficiencies in the market
• Work with a financial professional who believes in and implements active management strategies
• Stay connected to all sources of information (the Internet, magazines, talk shows, news, etc.)
• Read every article about stocks and options that you can find
• Wonder and worry about what might happen next
• Whatever you do, don’t miss the next hot stock tip!
HOW TO USEYOUR INVESTMENT PHILOSOPHY
MARKETS WORK MARKETS FAIL
ASSET CLASS INVESTING SPECULATIVE INVESTING
© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.
Directions:Answer each question “Yes” or “No.”
Your Answer must be 100% “Yes” to qualify as “Yes.”
THE 20 MUST-ANSWER THE 20 MUST-ANSWER QUESTIONS FOR YOUR QUESTIONS FOR YOUR
JOURNEY TOWARDJOURNEY TOWARDPEACE OF MINDPEACE OF MIND
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
QUESTION 1
Have you discovered your True Purpose for Money, that which is
more important than money itself?
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
Are you invested in the Market?
QUESTION 2
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Do you know how markets work?
QUESTION 3
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
Have you defined yourInvestment Philosophy?
QUESTION 4
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Have you identified your personal
risk tolerance?
QUESTION 5
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Do you know how to measure diversification in your portfolio?
QUESTION 6
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Do you consistently and predictably
achieve market returns?
QUESTION 7
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Have you measured the total amount of commissions and
costs in your portfolio?
QUESTION 8
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Do you know where you fall on the Markowitz Efficient Frontier?
QUESTION 9
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
When it comes to building your investment portfolio, do you
know exactly what you are doing and why?
QUESTION 10
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Are you working with a financial coach versus a financial planner?
QUESTION 11
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Do you have a customized lifelong game plan to guide all of
your investing and spending decisions?
QUESTION 12
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Do you have an Investment Policy Statement?
QUESTION 13
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Have you devised a clear-cut method
for measuring the success or failure of
your portfolio?
QUESTION 14
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Do you fully understand the implications and applications of
diversification inyour portfolio?
QUESTION 15
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Do you have a system to measure
portfolio volatility?
QUESTION 16
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Are you aware of the incentives brokerage firms and the financial
community have when selling commission-based products?
QUESTION 17
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Do you know the three warning signs that you are gambling and
speculating with your money versus prudently investing it?
QUESTION 18
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Can you identify the cultural messages and personal mind-sets about money that destroy
your peace of mind?
QUESTION 19
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Are you ready to shift your personal experience of money and investing from a scarcity mode to an abundance mode?
QUESTION 20
© 2001-2008 McGriff Publishing, a division of Abundance Technologies, Inc.
85-100: Amazing Investor Congratulations! You are among the most educated, diligent and confident investors. You have experience in the investment markets and understand what it takes to be successful. Now is the time to support your current knowledge with discipline and educational reinforcement.
65-80: Better Investor As a Better Investor, you have been around the block a time or two and maybe had some less than successful investing experiences. Now is the time to expand your knowledge about investing and begin to make some solid choices about your financial future. To achieve this, seek answers to the questions you missed.
45-60: Common Investor You are not alone. Like many investors, you may frequently find yourself uncertain and confused about how to make the right investment choices. If you don’t already have an Investor Coach that you trust completely, now is the time to build a relationship to last a lifetime.
25-40: Discouraged Investor It’s easy to feel discouraged when you have been doing what you thought were the right things with your money without success. You may have followed all of the advice that you’ve read in financial magazines and newspapers, yet you are not getting the exponential results you had expected.
0-20: Frustrated Investor Flustered and confused, you may wonder where to begin--how is it even possible to wade through all of the information that you are being bombarded with on a daily basis. Sort through the chaos and find a path that is right for you.
Give yourself 5 points for every “Yes” answer.SCORING:
© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.
Learn more about what this means for you
THE OPPORTUNITYTHE OPPORTUNITY
© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.
CONGRATULATIONS!CONGRATULATIONS!
You have developed your Personal Investment Philosophy and have learned how to put it to use.