Consider This Before Defining Your Investment Philosophy
There’s a particular long-term investment philosophy that has served me and my clients well, and it can do the same for you. It consists of two critical elements:
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- The investment strategy and tactics you employ should flow from your investment goals.
- Even more importantly, the optimal strategy should offer the simplest and most elegant solution to reach those goals.
Let’s take each of those elements in turn.
Prioritizing Goals Before Developing an Investment Strategy
Personal goals should inform your investment philosophy. Developing a strategy and implementing tactics without clearly identifying your goals beforehand is like shouting random solutions to a math problem you haven’t even read yet.
At best, it’s a shot in the dark.
When it comes to real estate-related goals, investors must choose one of two paths. Do you want to set an income goal or an ego goal?
Here’s an example of each.
- Income goal: I want to create $50,000 per year in passive income through real estate investing in order to gain financial freedom.
- Ego goal: I want to build a real estate empire by maximizing the number of units I own.
Directing Your Focus Toward One Goal
These two types of investing goals don’t have to be mutually exclusive over the course of someone’s life, but investors should only focus on one at a time.
Much like the human brain can’t actually multitask but instead switches back and forth between tasks, pursuing these two types of goals simultaneously means you’re not giving your all to either.
When I talk about ensuring you’re clear about a goal, I mean reducing it down to its essence and coming up with actionable, concrete steps to achieve it. General goals are typically neither actionable nor concrete.
For instance, if your goal is to reach financial independence, you’ll have to dig deep to figure out exactly what that means. It should be personal. What may help you acquire financial freedom might be insufficient for another person or excessive for someone else.
What would it take for you, personally, to become financially independent?
- Do you need passive income that will simply cover your current expenses (read: just enough to maintain your current lifestyle)?
- Or do you plan to travel and want to keep investing and therefore need passive income that can replace your current salary?
The point is to spend some time thinking about what you’re trying to accomplish and what it will take to get there. Your answers don’t have to be 100 percent exact, and you don’t need to have all the answers now. But you should be thinking about it.
Once you are clear on the type of goal you want to pursue and have reduced the goal to its essence, the strategies and tactics you employ will naturally flow from there.
Identifying the Best Way to Reach Your Goal
That brings us to the second (and most critical) element of my investment philosophy. The optimal investment strategy is the one that offers the simplest and most elegant solution to help you accomplish your goal.
If your aim is to create passive income of $50,000 a year through real estate investing, you can achieve that by owning five units free and clear or 25 leveraged units. Either will solve the problem.
Ask yourself, “Which one is the simplest and most elegant solution?” The answer should become obvious.
In the aforementioned example, the smaller free and clear portfolio is a far simpler and more elegant solution than a larger leveraged portfolio.
Why? It’s easier to acquire and manage fewer units. Plus, a smaller portfolio should equate to less hassle. Last but not least, it would mean far less risk for the same level of income.
The same principle also applies to investing in the stock market.
On one hand, you could try to “beat the market” by timing investments such that you’re buying when the cost of shares hits bottom and selling when they’ve topped out. To do this might mean investing in risky and complicated securities you don’t really understand or finding “expertly managed funds” that promise “extraordinary performance.”
On the other hand, you can automatically invest a percentage of your income in index funds at regular intervals (called dollar-cost averaging), regardless of how the market is doing. Then, you can focus on managing variables that are actually within your control, such as keeping costs low, staying the course, and never selling based on fear.
The second option is by far the simplest and most elegant solution. It will produce the results you desire without subjecting you to a rollercoaster of euphoric peaks and panicky dips.
Life is plenty complicated as it is. Your investing philosophy doesn’t need to be. Let it flow from your goals so it actually serves you, simply and elegantly.
Comments, critiques, suggestions?
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