A retirement plan is essential to ensure that you get where you want to go before the moment of truth arrives. But success requires more than a simple strategy telling you what to buy and when to sell. Rather, your investment philosophy is just as significant for long-term success in a robust retirement savings plan.
Where does investment philosophy align with the rest of the heavy lifting your financial team may be doing to help you prepare for your golden years? Here’s what you need to know about what it is and how to factor it into your plans.
Philosophy vs. Strategy: What’s the Difference?
Most investors are familiar with the need for a strategy, regardless of whether they are seasoned or new to investing. However, there is a significant difference between an actionable strategy that a financial advisor may employ to grow wealth and a philosophy that guides all decision-making.
Do you have both on deck for your retirement plan?
A strategy acts as the map for your retirement savings plan. It details the tactical moves that your financial advisor will make. These moves can include things like asset allocation, or where your advisor puts aggressive growth into Roth accounts, or even rebalancing at regular, agreed-upon intervals.
On the other hand, a philosophy serves as the compass that helps you navigate the map. All of the fundamental beliefs you hold about the world tie into the philosophical underpinnings of your investment strategy.
Consider the beliefs you hold dear when making crucial retirement decisions. For example, you might believe that markets are efficient and reflect all known information or that you are capable of finding undervalued gems before others do. Both of these can influence the way you move on the strategy suggested.
The truth is that strategy fails without philosophy. If you have trouble believing in your strategy’s core logic, you will want to change maps as soon as you hit traffic. In the long run, this proves to be extremely inefficient, as it wastes time moving stocks and assets around. You may move funds in and out of the markets every time your plans change.
Three Core Investment Philosophies to Support Your Retirement
In the moment, philosophies can be difficult to pinpoint without reflection. However, you might find that your retirement strategy centers on these three core investment philosophies.
Belief in Human Ingenuity
At its core, this philosophy represents the foundational idea that companies will continue to focus on innovation and growth over decades. It ultimately encourages long-term stock growth rather than cash holdings.
Someone who integrates this philosophy into their strategy might emphasize maxing out a 401(k) and other long-term investments, as they believe these funds grow faster to support them in retirement than a simple savings account would.
Risk vs. Volatility
Investing comes with two downsides that will eventually need to be embraced: risk and volatility. Risk is the permanent loss of capital, whereas volatility denotes the temporary ups and downs of the market.
People who fall into this philosophical category acknowledge this distinction. They understand that volatility is just the price of admission for long-term growth, and a temporary dip in the market is not necessarily “risk.”
The result is that they tend to stay invested during volatile times when the market dips 20 percent or more. This fluctuation is viewed as a temporary “sale” rather than a permanent loss. This person may see it as a buying opportunity.
The Role of Evidence
The market moves in cyclical patterns, moving from boom to bust and every spot in between. At all times, the market responds to one of the four phases of economic growth: boom, peak, bust, or trough. Some people will attempt to time the markets in these phases, buying when prices are low and trying to predict when the boom will come around again.
Instead of attempting to one-up the market, people who hold this philosophy will make decisions based on 100 years of data rather than the last 100 minutes of news. When you pay attention to the headlines more than long-term market data, you may make emotional decisions during a new downturn that can have far-reaching effects for your wealth.
Creating an Investment Policy Statement (IPS)
At the end of the day, every investor should have an Investment Policy Statement (IPS). This is a clearly worded document that outlines your philosophies on investments, how they influence your strategy, and the guidelines you want your financial advisor to follow.
Having an IPS gives everyone involved in your financial life clarity into what matters to you. The more detailed you can be in your IPS, the more consistent your strategy will be—especially helpful if you change advisors in the future. It brings transparency, in turn creating accountability and the framework for compliance as performance improves.
If you would like to develop an IPS, you can start today. It starts with an awareness of yourself as an investor: your goals, your time horizon, and your risk tolerance based on life stage. These facts compiled in one place allow you to see what you need and want. Be as clear as possible on these points.
Don’t forget that an IPS is a living document, not something you can set and forget. You will need to periodically review and update it as your financial situation or philosophy changes. Share every version of the document with your financial team so you can educate them and open lines of communication for everyone involved.
Let Magellan Help Implement Your Strategy and Philosophy
When you’re ready to embrace your philosophical approach to retirement investments as much as you do your strategy, let Magellan help. We keep financial, legal, and tax advisors all under one roof so you get comprehensive planning with one goal in mind: your growth.
Get started today by scheduling a consultation with one of our experts!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.