Our Investment Philosophy
An investment philosophy is a set of guiding principles that inform and shape our investment decision-making process. The investment philosophy at Rockbridge Financial Planning is outlined below.
The importance of a robust and consistent investment process
The investment process always starts with the client so we can get a clear understanding of their objectives and unique circumstances, their investment timeframe, their tolerance to investment risk and their risk capacity. Once these key considerations are clearly identified at the outset and agreed upon, an appropriate investment strategy can then be put in place. Any material changes to these considerations can be incorporated into the investment strategy as and when required.
The importance of discipline
The single biggest obstacle to creating wealth is likely to be our own behaviour. Carl Richards coined the term “behaviour gap” which can be described as the gap between investor returns and investment returns. Our natural instincts are to react to the concerns of today but a disciplined investor looks forward to the long-term growth potential of markets. The basis of our philosophy is that investors tend to overreact in the short term due to emotional stress or excessive optimism. The cost of getting market returns is living through market volatility. If investors follow a structured and disciplined approach to investing they will avoid many of the biases which cause them to act in irrational ways. Our job as a financial planning firm is to help guide our clients through this process.
The benefits of diversification
Diversification is one of the central pillars upon which investment advice at our firm is based. Diversification is the principle of spreading investment risk. The Nobel Prize winner, Harry Markowitz, formulated the idea that if an investor holds a spread of investments, the investor gets the average of the returns from all the investments but at less than their average individual risk. Diversification reduces the risk that any individual manager, security, sector or country can have on an individual portfolio. A well-diversified portfolio helps reduce uncertainty, helps to manage risk and can increase the reliability of investment outcomes.
Avoidance of market timing
Because we do not believe in the predictive ability required to correctly time markets, we structure investment portfolios with a long-term time horizon in mind. Through a disciplined approach to portfolio rebalancing and through a commitment to investing on a regular basis, the benefits of market timing can accrue to an investor. The power of compounding returns that accrue to long-term investing in the market is best described by Albert Einstein who said that “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
The importance of risk management
Optimisation of investment returns rather than the maximisation of investment returns is a core philosophy of our firm. We seek to optimise investment returns by either seeking the highest potential return for a given level of risk appropriate to the investor’s profile or seeking the lowest level of risk to achieve a specific desired level of investment return.
Risk-adjusted returns, which are a measurement of the investment returns on an investment relative to the risk profile of that investment over a specific period, form a core component of the investment process. The emphasis at our firm is on consistency of returns over time and less on one-off high returns.
Keeping costs reasonable
Investment performance by its nature will be variable and unknowable but one thing we can be clear about are the costs involved in the investment process. The question is not whether investors must bear some costs, but whether the costs are reasonable and indicative of the value added by the investment strategy and the ongoing guidance provided to the investor. It is our philosophy to keep costs as low as possible but without diluting the strength of the investment proposition.