Financial Mom’s Investment Philosophy

by financialmom on March 11, 2010

in Financial Advisor, Investing, Investment Philosophy, Passive Investing

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I am frequently asked what my investment philosophy is, and as it is different from many advisors  in the financial industry, I decided it was time to put it in writing here.  

First of all, the basis I use for my investing principles:

Markets are Efficient

I believe in the efficiency of the markets, not in investment managers. I believe investors are entitled to the returns capitalism provides, and spending time and money to find the next great money manager is usually a wasted effort.

Passive Investing

Many times the best thing to do is to hold steady.  Passive investing works in a diversified investment plan to maximize returns, while minimizing transaction costs and income taxes. The traditional active management mentality is to continuously buy and sell, often chasing the latest fads.

Unbiased Research

The unbiased research of Nobel Laureates and some of the most respected academics in modern history provide a more prudent guide to portfolio construction, with no conflicts of interest. Many fund managers use conflicted research, influenced by corporate-run media, to guide their investment decisions.  They may also share revenues with marketers, making them prone to even more conflicts of interest.

Disciplined Diversification

Investment discipline is relentlessly practiced.  I don’t just believe in diversification, I practice it on all levels, because I know the firm relationship between risk and return. Many managers lose investment focus, exposing investors to undue risk in their overall portfolio.

Don’t Try to Beat the Markets

Don’t try to beat the markets – benefit from them.  Typical money managers are often driven by one futile goal: to “beat” the markets. They try desperately to predict the future. They maneuver in and out of asset classes – hoping to catch the right asset classes before they swing in or out of favor.  They buy and sell specific stocks and bonds – attempting to make their move before prices go up or down.

My approach is not to attempt to outsmart the markets by picking the right stocks or the right active money managers, but to use diversified portfolios that offer investors consistent exposure to all markets.

Master Diversification

While markets are by nature efficient, that doesn’t mean you can predict their movements. If you are going to consistently benefit from the markets, you need to be invested across all of them, all of the time. That way, when one market segment goes up, you’ll be there to reap the gains, and when another segment goes down, you won’t be overly exposed to its losses.

You probably have heard it’s wise to diversify.  Optimal diversification is achieved not just with hundreds of stocks, but thousands of them, not just across the US market, but across the whole world. For these reasons, diversification is a core element of an investment strategy.

As unusual as it sounds, the best way to lower the overall risk of a portfolio may be to add “riskier” assets.  It’s all about balance.  Different types of investments react differently to the same market conditions. In fact, the more distinctive the investments, the less “correlated” their returns.  In other words, the less likely they will move in the same direction at the same time.  That means including allocations to domestic, international, and emerging markets.

Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology does not guarantee a profit, or protection from loss in a declining market.

Assess Which Risks May Be Worth Taking

Rewards are optimized by assessing which risks may be worth taking. Diversifying around the globe, across the spectrum of asset classes, and among thousands of securities can help to reduce certain risks – like the risk of picking a few “loser” stocks, or being overly exposed to one country’s faltering equity market.

To optimize returns, there are some other risks that may be worth pursuing.  You probably already understand the basic principles of stocks providing higher returns than bonds, and that stocks may subject you to higher risks, since risks and returns are firmly linked. An emphasis is given to stocks over bonds, value stocks over growth stocks, and small company stocks over large company stocks, since over time they have provided higher returns.1,2

Less disciplined investors may be tempted to overreact, and only use fixed-income investments, growth stocks, and large company stocks.  The key to investing is balance - diversifying across asset classes, and stategically weighting the exposure towards investments that may offer the potential to optimize returns for fairly priced risk.

New Profile Pic 2599R Financial Mom’s Investment PhilosophyPamela Otten is CEO of Pamela Otten LLC, a Registered Investment Advisor. She loves to work with women business owners and entrepreneurs, and women in transition due to job change, death, or divorce. Pamela will help you set and reach your financial goals, educate you to understand your investments, and teach you how to do more charitable giving. Pamela is a Qualified Kingdom Advisor (www.kingdomadvisors.org), trained and committed to integrating biblical principles with her investment advice.

cc smallest Financial Mom’s Investment PhilosophyPhoto Credit – bfishadow

Financial Planning, Investment Advice, and Investment Management provided through Pamela Otten LLC, Registered Investment Advisor.

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