Strategic Risk Management: A Practical Guide to Portfolio Risk Management

CHAPTER 3

Investment Beliefs

Investment markets are inherently noisy places. All investors aim to beat the market, or achieve “better than average” returns, and in doing so spend significant resources and time in this pursuit. However, we can all become lured by the latest new idea or fad that promises superior returns. We must be able to distinguish between fads and ideas with genuine investment insight. Doing this begins with a well-formulated investment philosophy, or set of investment beliefs.

These beliefs represent how we, the investors, think markets work and consider our behavior with respect to those markets. Not only do we have to consider the evidence about markets; we also must examine our own strengths and weaknesses to establish investment beliefs that suit us.

Investors without strong investment beliefs tend to drift from one strategy to the next. The result is excessive transaction costs and the high chance of incurring losses chasing the next best thing. Investors with clear investment beliefs tend to be more consistent and disciplined in their investment strategies and are more likely to achieve their investment objectives.

WHY HAVE INVESTMENT BELIEFS?

Investment beliefs are a consistent way of thinking about markets and how they work (or at times do not work). Many investors do not have a clear set of core investment beliefs.

Such investors engage in investment strategies that seem to work and then abandon them when they do not. Without investment beliefs, we ...