Are you investing or speculating?

If you boil it down, there are really two primary schools of thought when it comes to managing money.  The first philosophy believes in these core principles:

Philosophy 1

  • We can outguess the market
  • Diversification is not a priority
  • Concentrate in only our best ideas
  • Trade frequently
  • Charge higher fees to the end investor for our best ideas and attempt to beat the market

Philosophy 2

  • Prices are generally fair so we trust them
  • Achieve global diversification
  • Keep trading activity low
  • Keep costs and taxes to a minimum
  • Structure portfolio along the dimensions of expected return

We generally label Philosophy 1 as “Speculation.”  Here is a good stat for you.  Only 17% of US equity mutual funds and 18% of bond mutual funds have survived and outperformed their benchmarks over the past 15 years.  Even if you were to select one of those mutual funds that did outperform, research does little to support that they will stay on top. In fact, only 23% of equity funds and 27% of bond funds in the top quartile of previous 5 year returns maintained a top quartile ranking in the following year. The odds are not in your favor.

We generally label Philosophy 2 as “Investing.” Long-term discipline largely determines the success of your investment program. If you get spooked by short-term noise in the market and feel that you can position the portfolio to profit from news events, it’s important to understand that this is speculation. We believe that investors who instead embrace principles of true investing greatly improve their chances of achieving benefits that capital markets can deliver. Our approach is to be a genuine investor. Should you have any questions, please do not hesitate to reach out to one of our advisors to learn more.

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