The Error-Proof Portfolio: Why You Need an Investment Philosophy

Having conviction in your belief system can help you act with discipline

Christine Benz 13 August, 2013 | 9:28AM
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"Strategy comes from philosophy. If you don't have a philosophy, you can develop a strategy, but it's only going to blow apart the next time it doesn't work for a month or two. And you are going to go onto another strategy, and that's the worst thing you can do."

Author and investment manager Rick Ferri made that comment in an interview with me late last year, and the conversation stuck with me. The most surprising part of our discussion was that Ferri, a dyed-in-the-wool indexer, believes that investors don't necessarily need to use passively managed investments for their portfolios. He noted that your philosophy could be that you can pick out active managers who can outperform, that you could index, or that you can adjust your portfolio's asset allocations tactically over time. What's really important, he said, is that you have a philosophy that makes sense to you and that you believe in--and that you then create a strategy which you would execute with discipline. 

My interactions with hands-on investors and observations of professional money managers corroborate Ferri's views. As much as pundits might dogmatically espouse one investing philosophy or another--making it seem like it's their way or the highway--there are thousands of investment philosophies--and in turn strategies--that can help investors reach their goals. If you believe that dividends are king and that high-income stocks are all you need for your retirement plan, well, that's not exactly the way I would do it, but it's not unreasonable, either. If you believe in keeping it simple and want to limit your holdings to a single, well-diversified fund like Vanguard rather than messing with a portfolio full of individual investments, more power to you.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.