Investment Philosophy | Enduring Principles We believe there are enduring principles that should underlie each investor’s investment practices. Investors should keep these in focus, which is sometimes difficult given the noise of the financial press and pitches of financial product salespeople. The principles include:    An investment policy should be the foundation of any investment portfolio. That policy will set the boundaries of allocation to major asset classes and be tailored to the client’s need for returns and ability to endure volatility. While the policy may or should evolve with the client’s experience and circumstances, departures from policy should be exceedingly rare.    The price of higher returns is volatility. Those asset classes whose values fluctuate the least (such as Treasury bills) pay the lowest long-run returns. Nearly all investors need higher returns than those classes can offer, both to support spending and to defend against inflation.    Time is the investor’s friend. Longer time horizons narrow the variability in returns for an asset class and make higher return classes (such as stocks, real estate, commodities) worthwhile. Consequently, investors holding those assets should expect to “be paid” in higher returns over long horizons and expect intervening periods of decline. Investors naturally may want to flee markets during or after declines, but success requires managing these emotions to avoid locking in loss.    Diversification among asset classes reduces risk over time, but in the short term (such as the current crisis) many asset classes can be negatively or positively affected by events simultaneously. Even within a single asset class, investors should be diversified by manager investment style. Combined with a disciplined portfolio review, diversification gives investors the opportunity to rebalance among assets and thereby reposition toward better value.    Attempts to sell stocks in advance of a market decline and buy back later at a lower price are very risky and over time are destructive to client wealth. Several studies show that investors consistently lose value by attempting to time their entrances and exits to the markets. Market timing will forever be a temptation because we hear stories of investors who claim to have done it in certain instances and the financial press is often focused on such simplistic questions as “Is this the time to buy [or sell] stocks?”    Financial innovation is a persistent feature of life in the financial markets, but is of limited utility. The current crisis has demonstrated quite well that the lack of liquidity and transparency associated with many esoteric assets means that they must be used with great care and only for their intended purpose. In our experience, most financial innovation benefits the product seller more than the investor, meaning that open-mindedness should give way to skepticism if the overall benefit of an approach is not fairly clear. Financial Fitness is the Foundation Reasonable Expectations - the Current Crisis Enduring Principles © Copyright 2010 - Frederic T. Kutscher Associates, Inc. All Rights Reserved. | Disclaimer