My Investment Philosophy
Markus Muhs - Nov 26, 2018
You may be an existing client, you might have found this website and are considering becoming a client, or you might be someone who manages all their own investments. Either way, my hope is that the below can be of some general guidance.
Whenever I meet with a potential client for the first time, the hour or hour and a half initial meeting is spent primarily getting to know them and answering questions about my business and general financial planning. Rarely do we actually talk investments.
I've seen other advisors go right into a meeting with a pitch book of ideas or strategies, but that was never my style because as an holistic financial planner it's impossible to suggest an investment strategy before really knowing the client and their goals and circumstances. As a result, prospective clients left the initial meeting without any idea of how I would actually invest their money. Therefore, I created this list of 10 key beliefs and principles that guide my investment philosophy.
As a reader of this blog you might be an existing client, you might have found this website and are considering becoming a client, or you might be someone who manages all their own investments. Either way, my hope is that the below can be of some help, some general guidance, whether to know me better or to inform your own investment decisions.
Evidence Based Investing
The above term (usually shortened to EBI) can mean different things to different people in its application. Generally it means informing your investment decisions by cold hard evidence, as opposed to emotions or investment industry marketing (ie: fancy mutual funds or high-flying hedge funds). To some, an evidence based portfolio follows modern portfolio theory using exclusively the lowest cost cap-weighted index funds available... because historically that has worked. I go a little deeper in my thinking than just sorting funds from lowest fee to highest on Morningstar. The portfolios I build are grounded in the following 10 beliefs and principles:
1. Invest in a well-diversified portfolio owning the great companies of the world. Own them for the rest of your life, through thick and thin, through some efficient, low cost form of ETFs/mutual funds. Keep buying more, as you can afford to do so. When you retire, they'll pay you dividends which historically have tended to increase at a rate faster than inflation. Unless you need the income stream, reinvest all dividends.
2. Market timing is a road to failure. If you’re looking to beat the 8% long term average of the stock market you need to make 2 brilliant timing decisions every time: both exiting and re-entering the markets. Neither I, nor any financial expert, can predict the markets nor recommend the perfect investment at the perfect time. Anyone who claims they can is either lying or stupid.
3. Owning individual stocks versus funds adds a layer of risk without a corresponding lift in potential returns. Generally, I don’t gamble on individual stocks unless the aim is to own a well diversified basked of them for a very long time.
4. Mutual Funds/ETFs with lower costs have a built in “fee-alpha”. Less fee going to fund managers means more money stays in your portfolio, allowed to compound over the long-term.
5. The majority of portfolio managers don’t beat their benchmarks. When in doubt, index. In some areas, factor/active management may provide a benefit to the overall portfolio composition at an increased cost, though these are used judiciously and with extensive research of the manager and process. It should be a conscious decision to choose active management for a portion of your portfolio; not the default.
6. A fund manager’s outperformance is only relevant if it can be attributed to a repeatable process. A track record of less than 10 years is mostly irrelevant. Never pay a performance fee that is based on short-term (less than 5 year) outperformance.
7. Your asset allocation between stocks & bonds is the greatest determinant of your portfolio’s future risk and return. Furthermore, avoid home bias; Canadian stocks should represent the minority of your equity holdings. Rebalance annually, taking from outperforming asset classes and putting into underperforming ones.
8. The balance between Value and Growth in a portfolio should also be managed, not allowing a portfolio to become too heavy in growthy stocks during a bull market, or light during a bear market. Over the very long term history, value has outperformed growth. Growth can outperform for years on end though, putting value to shame (as it has over most of the last 10 years). Outperformance of either skews the cap weighted index one way or another, necessitating a "tilt" away from cap weighting.
9. No one industrial sector (ie: financials, technology, energy, etc) should represent more than 20% of your overall portfolio at any time. No one business (ie: pipelines, railways, or one specific stock) should represent more than 10%.
10. WHAT you invest in is always secondary to HOW you invest. Your personal discipline as an investor, and/or my ability to counsel you through good times and bad determine your long-term results; not the products you invest in.
I will add that before engaging in any kind of speculative investing, whether it be venture stocks, cannabis stocks, crypto, land/real estate deals, you should have a core portfolio that adheres to the above 10 points.
If anyone wants to challenge me on any of this, you can find a link to my Twitter in the website footer.
Markus Muhs CFP, CIM