Have you ever thought about the difference between a dream and a goal? While both are important, one difference could be that the first involves wishes, hopes, and idealistic visualizations, and the second one involves plans, actions, and decisions that lead to a desired outcome. Certainly, a dream can result in a goal, but it may be that a dream without a goal attached is less likely to ever happen.
In financial planning, we want to know about our clients’ dreams: their vision for their ideal future. But it’s important to take matters a few steps further if we are serious about helping them achieve or realize those dreams. With our clients, we need to establish goals that include specific steps and decisions.
One of the most important elements of setting and achieving financial goals is having an investment philosophy that guides your actions. When you have firm convictions about the nature of the financial markets and how they will impact your financial goals, you are able to implement strategies that can take you from where you are now to where you want to be in the future.
At Mathis Wealth Management, we operate according to an investment philosophy. That philosophy is built around evidence-based understanding of the financial markets, coupled with careful listening to our clients. By obtaining a thorough knowledge of our clients and their dreams, goals, and priorities, we are able to help them construct a financial plan that matches their “investment personality” with their most important financial goals.
In this article, we’ll present a question-and-answer session with our founder and CEO, Larry Mathis, to provide clarity around the importance and application of an investment philosophy and the investment strategies that flow from it.
QUESTION: In your opinion, what is the most important thing about having an investment philosophy?
LM: Probably the most important benefit of having a well-defined investment philosophy is that it helps to prevent making important financial decisions on the basis of emotion. Let’s face it: money is an emotional topic for everyone. And when we read headlines in the financial news—whether they’re predicting a major market correction or a major upside move—we can easily allow our emotions to take over. But the problem is, financial research tells us that investors who make knee-jerk, emotional decisions based on short-term market movements are much less likely to achieve their long-term goals than investors who are disciplined and committed to a well-thought-out financial strategy.
QUESTION: What do you consider the most important aspect for helping someone build a financial strategy?
LM: The most important thing we do at Mathis Wealth Management is listen. We ask our clients and prospective clients lots of questions, because we want to know as much as we can learn about what’s most important to them, what their plans, hopes, and dreams are, what level of risk they’re willing to accept in order to meet their goals, and what they believe about the financial markets. Once we know those things, we can help them make decisions about the most appropriate actions to take to put their financial and investing strategy in place.
QUESTION: How important is diversification as an investment strategy?
LM: Building a well-diversified portfolio is probably the most important step any investor can take. The old adage—“Don’t put all your eggs in one basket”—really proves out. In fact, once we’ve taken the step of learning all we can about our client, the next step in the process is helping them design a portfolio of investments that is matched to their profile and that contains an appropriate variety of assets as dictated by their tolerance for risk, their age, and their most important long-term goals. Variety is important, because the basic principle of diversification is that the value of different types of assets will be affected differently by various market or economic conditions: while one part of the portfolio may be down at a given time, another part may be up. In other words, diversification helps to smooth out the volatility experienced by the overall portfolio. There is risk involved in any investment, but appropriate diversification is the investor’s best tool for spreading risk effectively.
QUESTION: Is market timing an effective investment strategy?
LM: We are less interested in “timing the market” than “time in the market.” Research indicates that those who try to move in and out of the market in order to improve portfolio performance usually fail to achieve their goal. In fact, statistically speaking, the vast majority of attempts at market timing achieve no better than a random rate of success. What many people fail to take into consideration is that today’s financial markets are constantly and almost instantaneously digesting all the available information about the economy, world events, interest rates, individual companies, and everything else that impacts market prices. Every moment, thousands of individual buying and selling decisions are being made, and the collective effect of all those decisions is reflected in market pricing. The notion that a single individual is able to incorporate all that data into a more effective and precise decision is just not realistic, in the vast majority of cases. For this reason, we counsel clients to add investments to their portfolio that match their profile and to hold those assets for as long as it makes sense in the context of their long-term strategy. We don’t try to outguess the market; we try to let it work for us instead.
At Mathis Wealth Management, our fiduciary duty to our clients requires us to provide guidance and recommendations that put the client’s best interests ahead of everything else. That’s why we are committed to obtaining the best, most authoritative research we can find and making it available in the form of practical, concrete advice. To learn more, please visit our website and read our article, “Staying Focused as Markets Shift.”
Disclosure: Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets. All investing involves risk and there is no guarantee that any strategy will ultimately be successful.