Choosing Your Investment Philosophy

© 2001-2006 McGriff Publishing, a division of Abundance Technologies, Inc.

CHOOSINGCHOOSINGYOUR INVESTMENT YOUR INVESTMENT

PHILOSOPHYPHILOSOPHY


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?


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.


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


• How does this dilemma affect you?• Describe how the Investors’ Dilemma has

affected your investment portfolio.

THE RESULT: NOT ENOUGH MONEY


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.


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.


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


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.


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.


MARKETS WORK MARKETS FAIL

•What does it mean?•What’s the story?

•Is there proof?

EXAMINING MARKET BELIEFS

Random price movements Predictable price movements


It is time to make a choice. What makes most sense to you?

WHAT DO YOU THINK?



PRINCIPLE 3Investment Strategy

TWO STRATEGIES FOR INVESTING

Structured Funds Speculative Funds

ASSET CLASS INVESTING SPECULATIVE INVESTING



Market ReturnsAsset AllocationLifelong Investing

Stock SelectionTrack-Record

InvestingMarket Timing

EXAMINING INVESTMENT STRATEGIES




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


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


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


BRINGING IT ALL TOGETHER

PRINCIPLE 2Your Market Belief+

=Your Personal Investment Philosophy

PRINCIPLE 1Your True Purpose for Money

PRINCIPLE 3Your Investment Strategy

+


• 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




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


QUESTION 1

Have you discovered your True Purpose for Money, that which is

more important than money itself?


Are you invested in the Market?

QUESTION 2


Do you know how markets work?

QUESTION 3


Have you defined yourInvestment Philosophy?

QUESTION 4


Have you identified your personal

risk tolerance?

QUESTION 5


Do you know how to measure diversification in your portfolio?

QUESTION 6


Do you consistently and predictably

achieve market returns?

QUESTION 7


Have you measured the total amount of commissions and

costs in your portfolio?

QUESTION 8


Do you know where you fall on the Markowitz Efficient Frontier?

QUESTION 9


When it comes to building your investment portfolio, do you

know exactly what you are doing and why?

QUESTION 10


Are you working with a financial coach versus a financial planner?

QUESTION 11


Do you have a customized lifelong game plan to guide all of

your investing and spending decisions?

QUESTION 12


Do you have an Investment Policy Statement?

QUESTION 13


Have you devised a clear-cut method

for measuring the success or failure of

your portfolio?

QUESTION 14


Do you fully understand the implications and applications of

diversification inyour portfolio?

QUESTION 15


Do you have a system to measure

portfolio volatility?

QUESTION 16


Are you aware of the incentives brokerage firms and the financial

community have when selling commission-based products?

QUESTION 17


Do you know the three warning signs that you are gambling and

speculating with your money versus prudently investing it?

QUESTION 18


Can you identify the cultural messages and personal mind-sets about money that destroy

your peace of mind?

QUESTION 19


Are you ready to shift your personal experience of money and investing from a scarcity mode to an abundance mode?

QUESTION 20


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:


Learn more about what this means for you

THE OPPORTUNITYTHE OPPORTUNITY


CONGRATULATIONS!CONGRATULATIONS!

You have developed your Personal Investment Philosophy and have learned how to put it to use.

Economy & Finance

Choosing Your Investment Philosophy