Investment Philosophy 101: What investment means to me.
I decided to pen down my own personal investment philosophy. I believe that having a philosophy in life, for any area, gives us clarity on how to act. A guiding philosophy helps us control what we can control: our decisions. It allows us to stop wondering about the infinite possibilities and focus on what is important. This allows us to make better decisions.
My philosophy is that investment is a long-term strategy where investors are rewarded for discipline and commitment over a long period of time.
The reason for my belief is backed by data. I believe in making decisions that are based on empirical data. And while past performance does not necessarily translate to future performance, it is also true that we cannot ignore past performances entirely. So why do I believe in the long-term investment strategy?
Why do Markets Exist?
It all boils down to the basic reason why markets exist. What does the market do? The market is a collection of companies, all working together to create value in order to capture their own share of clients. Each firm creates solutions for their client’s problems and the client’s lives are improved. Clients reciprocate by paying for the value they get from using the companies’ solutions and the companies' earn. When companies earn, their shareholders (or investors) earn. The cycle continues. The market is therefore a value-creating machine.
Of course, not all companies succeed. The landscape is littered with fallen angels, also-rans, and never-starts. But the market presses on. And because successful companies continue to exist, the market continues to create value and it grows. Staying invested over time allows us to enjoy the value.
Because companies come and go, because investors have different interpretations of and responses to the market, there is a lot of volatility in the market. Values move up and down on a minute-by-minute basis. Uncertainty is always in the air. Information takes time to process.
Over time though, such uncertainties get weeded out. Over time, expected outcomes become realized, or lost. Over time, companies grow, stagnate, or get eliminated. And based on the data, over time, the outcomes tend to be positive.
Hence the market rewards people who are disciplined and stay invested in the long run. The market rewards patience. In fact, if you time the market, the outcome is almost certainly going to be bad; missing out on just a couple of days will see your returns get reduced drastically.
So, how does this philosophy guide us?
If we believe in the data, then we know we need to hold on to our investments through the calm and through the storm. We need to weather every disaster well, having faith in the market to reward the participants. And during the course of an investment journey, you will almost certainly have to face different events that are beyond your control. Such events can lead to negative market outcomes, which can cause immense grief and anxiety. Poor decision-making, as a result of the stress, could sabotage your financial and emotional well-being.
So how can you get the best possible outcome?
Ultimately, we need to stay invested and to do so, we need to survive.
We do so by ensuring that our investment is well-diversified, across different asset classes and across different instruments. We ensure we have sufficient savings such that we do not need to rely on our portfolio to fund our daily lives. We get our basics right, including our budgeting and our emergency funds. We know that our investment will come through, we just need to give it time. Historically, the data tells us this is what works.
I’ve been asked before-“What if the market does not recover after decades?” That is always a possibility, and it remains to be a prevalent fear. But consider this: if the market does not recover after decades, this means that the companies are unable to create products for the consumers. If so, that means no one is spending, and the world economy is doomed. Remember, we are talking about decades. Decades of loss will mean nearly every instrument, and everyone will be affected. We might have a return to barter trade in such a dire situation. And if it does happen, it’s likely you have a lot more concerns on your mind.
The question you need to ask yourself is, are you able to hold on to the investment for a time period, to not need the money, to not be kept awake at night thinking about the funds. Stay focused on your day-job, while allowing your money to engage the market. Being patient and disciplined gives the best outcome. And creating a conducive environment to support such choices will allow this desired outcome to become a reality. Stay patient, Stay invested.
I write on topics related to financial habits and decisions. Do explore my other articles at https://www.williamseah.com/blog if the ideas intrigue you. Drop me an email at email@example.com or text me at 9673 1523 if you’d like to chat over coffee or whisky.