Reevaluating Your Investment Philosophy

Teresa Riccobuono

Many advisors use the beginning of a new quarter as a time to review their investment choices, sometimes called a “pick list.” If you fall into this group, consider including a review of your investment philosophy as part of the overall process.

Every advisor, myself included, has an investment philosophy from which all investment recommendations are developed.

Advisors will regularly reevaluate their investment selection, but rarely do they re-evaluate their investment philosophy.

With the availability of new information, the introduction of new products and the discussion of new strategies, it may be time to reconsider some long-entrenched thoughts regarding investments.

Investment philosophy considerations

Here is a short list of considerations that I have gathered from various advisors. This is not an all-inclusive list, as there is a multitude of items and issues to consider. How do you currently feel about your response to each bullet point? Is it outdated?

  • — Passive versus active management, or a blend
  • — Fund family (e.g., if fewer than 35 fund options, eliminate due to lack of selection for inter-family transfers)
  • — Company’s trading infrastructure – a small fund company may not have the trading capability of a larger firm
  • — Style purity, portfolio characteristics, number of holdings, risk/return profile, investment philosophy of fund manager/team
  • — Small-basket strategy – a few well-chosen stocks
  • — Use balanced funds for core, allowing the fund manager to decide on the allocation of growth versus value
  • — Management tenure, support team, compensation structure, succession plan
  • — Expense ratio
  • — Portfolio turnover, tax efficiency
  • — What is your definition of asset allocation? For example, what is the makeup of your “moderate” portfolio? Is it 50/50 or 40/60 equities to bonds or something entirely different?
  • — Will you compare selected funds to their corresponding index (apples to apples)?
  • — Is this a qualified or non-qualified portfolio or a combination of the two?
  • — How do you incorporate fringe/alternative investments into your larger portfolios?
  • — What is your sell discipline or risk management process (very important to high net worth clients)?
  • — How long does an investment stay on your watch list before you make a change?
  • — How often will you review and evaluate your pick list? When do you rebalance a client's portfolio?
  • — Do you want to be true to the top picks or evaluate top picks based on wholesaler relationships (a second set of eyes watching out for your clients’ investments)?
  • — Do you believe in timing the market? Sell in May, then go away? What about October?
  • — How do you handle clients who are decumulating their portfolio; pulling money from their accounts to live on? Do you incorporate a three-bucket strategy for the portfolio?
  • — Time period – when does the client plan to use the money?

As I mentioned earlier, there are several points to consider when creating an investment philosophy and ultimately a pick list. Allowing your biases to come into play during the evaluation process could be detrimental to your clients. Sharing your thoughts with other knowledgeable individuals and being open to hearing their feedback can be one of the most important actions you can take.