Personal Investment Philosophy

2010-01-03T22:57:00.002+08:00

How we ever known someone who received a substantial inheritance and quickly lost it on poor investments? Such events have occurred often, but especially when people forget to match their financial decisions with their usual manner of thinking, feeling and acting.

How Do We Handle Risk?

Risk - and our ability to handle it - greatly influences our personal investment philosophy. Risk represents the uncertainty that the yield on an investment will deviate from what is expected. Placing money in a government insured savings account incurs virtually no risk because the government guarantees both the principal and the yield. Buying shares in a corporation is riskier because no one can guarantee the future success of a company. For most investments, the greater the risk, the greater the potential yield. This potential for gain is what motivates people to accept increasingly greater levels of risk.

As an investor trying to figure out our own investment philosophy, we first need to determine our ability to handle risk. Basically, we need to determine how much anxiety related to our investments we can handle. We sometimes call this ability our "stomach and sleep quotient". Ask ourselves: What is our basic temperament or natural disposition? How well do we handle stress? How well do we sleep at night? Will our financial decisions cause loved ones to worry? Can we afford a 10, 20 or 30 percent loss on our investments? Will we take the time to investigate investment opportunities? Answering these questions honestly will help us match investments to our temperament and investment philosophy.

Conservative, Moderate or Aggressive

True investors develop an investment philosophy - a personal investment strategy that anticipates specific returns and risks and contains tactics for accomplishing our investment goals. Successful investors match investment philosophy with investment goals.

Conservative. The financial goal of obtaining a specific potential rate of return is accomplished by varied degrees of risk. If we have a conservative investment philosophy, we accept very little risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate current income and preservative of capital. We could be characterized as a "risk averter". Conservative investors often protect themselves by carefully avoiding losses and trying to stay with investments that have gains, often for long time periods. Tactically, they might sell investments when the price rises or falls 15 percent (although in practice it is difficult to implement such generic rules). Most investors approaching retirement or who are planning to withdraw money from their investments in the near future adhere to a conservative investment philosophy.

Conservative investors typically consider investing in obligations issued by the government, high quality (blue chip) corporate bonds and stocks, balanced mutual funds, fixed deposit and other money market instruments.

Moderate. If we have a moderate investment philosophy, we seek capital gains through slow and steady growth in the value of the investments and some current income. Such investors invite only a fair amount of risk of capital loss. Most have no immediate need for the funds and are instead laying the investment foundation for later years or building upon such a base. Moderate investors are fairly comfortable during rising and falling market conditions, remaining secure in the knowledge that they are investing for the long term. Their tactics might include selling investments when the price has risen 25 percent, selling if the price drops by 25 percent and spreading investment funds among several choices.

People seeking moderate returns consider investing in dividend paying stocks, growth and income mutual funds, high quality corporate bonds and real estate.

Aggressive. If we choose to strive for a very high return by accepting a high level of risk, we have an aggressive investment philosophy and could be characterized as a "risk seeker". Aggressive investors primarily seek capital gains. Many such investors take a long term approach, confident that they can profit substantially during major upswings in market prices.

People seeking aggressive returns consider investing in stocks of new or fast-growing companies, high-yielding junk bonds, aggressive-growth mutual funds, undeveloped land, precious metals, gems, commodity futures, stock-index futures and collectibles of every stripe. Devotees of an aggressive investment philosophy sometimes do not spread their funds among many alternatives and they may also adopt short-term tactics to increase capital.

Aggressive investors must be emotionally and financially able to weather substantial short-term losses - for example, a downward swing in price of 30 or 40 percent - with the expectation that an even stronger upswing in price might occur in the future.

INVESTMENT MANAGEMENT

Personal Investment Philosophy