Investment Philosophy

Outlined below are the principles that, taken together, make up our investment philosophy. These fundamental beliefs are reflected in our disciplined investment process and drive every decision we make.


Principle 1: Short Term Market Timing Does Not Work

Every investor has to “time the market”. Every investor determines when to begin investing and when to make changes. But the shorter the period of time that an investor uses to evaluate market movements, the more those changes in prices are influenced by inexplicable causes. Put another way, what individual securities do tomorrow is often entirely unpredictable, because it is based on unpredictable events. Short-term fluctuations in the market are caused primarily by market movers and the latest headlines, not fundamental economic data.

For those of you who are tempted to believe your friend can beat the market with your money, consider the following. If someone was able to buy low and sell high consistently, why would they manage anyone else’s money? We suggest that they wouldn’t. They would borrow money at low interest rates and invest the funds, making a fortune in the markets.



Principle 2: Decision Making Should Be Systematic

Portfolio adjustments should typically be made at regularly scheduled intervals so as to avoid “emotional risk”. Most investors react to short term market fluctuations, falling prey to their emotions. They look for short term relief at the expense of long term success. Perhaps you can relate to the feeling of wanting to follow yesterday’s stars, only to sell at low prices after the investments fall back to earth and end up in making a crater in your portfolio.

However, no one has to be told that buying high and selling low is not a recipe for financial success. And yet when it comes to investing, that is where emotions lead. DALBAR publishes an interesting study every year, capturing the effects of individual investor activity over against what the market actually returns. Over the past 30 years, investor decisions (often driven by emotions rather than data and sound processes) have not served clients well. The average equity investor has returned less than 4% while the S&P 500 has returned 11%.

Investor Returns 1985-2014

This “Cycle of Emotions” leads to buying at high prices and selling at low prices, playing a key role in diminishing investment returns. Plan Financial, however, systematically implements portfolio changes regardless of the headlines that influence the market over the short term. By having a clearly defined process anchored to a consistent philosophy, our investments decisions often work in contradistinction to our (and our client’s) emotions. In other words, we often buy at lower prices and sell at higher prices; enduring short-term discomfort for the sake of long-term success.


Principle 3: Economic Outlook Should Consider At Least 3-5 Years

Economic outlooks must consider no less than a 3-5 year time horizon. Prices in security markets are historically prone to wide over or under valuations. However, over longer time periods prices generally follow certain economic fundamentals. For example, as analyst John Hussman has painstakingly documented, historical evidence suggests that price distortions in stocks are dramatically reduced when looking beyond 6-7 years, and are entirely eliminated beyond a 12 year-horizon. In other words, stock prices (and consequently future returns) are better evaluated looking out over 5-10 years than 6-12 months.

Hussman Chart

* Hussman Funds, Accessed 05.24.16

Further supporting the idea of a minimum 3-5 year outlook is that financial markets generally move in tandem with business cycles that  average 4-5 years in length.  As a result, economic growth (and growth in stocks) is much less accurate when looking out over less than four years. By looking out over 5-10 years, our portfolio changes are based on more accurate return projections.


Principle 4: Clearly Defined Asset Strategies Provide True Diversification

A wise man once said “cast your bread upon the waters…in seven or eight different places, for you do not know what the future holds.” At Plan Financial, we firmly believe that multi-strategy mutual funds provide a third level of diversification, leading to consistent and reasonable returns over a full market cycle.

Because the market is unpredictable, concentrated investment positions are perhaps the easiest way to destroy capital. While most portfolios provide diversified investment style funds (such as “high yield” or “large cap”), they often lack diversity across specified asset strategies. Many managers end up “drifting” from strategy to strategy, chasing the best performing asset strategy. Unfortunately, this often leads to underperformance as evidenced by the results of Morningstar’s annual survey of the mutual fund industry. As seen below, of those funds in the large-cap sector that outperformed from 2006-2010, over 50% dropped to the bottom quartiles or were closed down over the next five years. Conversely, of those in the top quartile from 2011-2015, two-thirds were either new funds or funds that were in the bottom quartiles over the previous five years.


Source: SEI, Morningstar Direct, U.S. Large Blend Universe over the entire 10-year period from 12/31/05 through 12/31/15. Based on the Morningstar universe of 4,125 U.S. Equity Large Cap Blend managers.

In other words, outperformance is difficult for managers to maintain. However, having clearly defined multi-strategy funds provides our clients with stable and consistent returns over complete market cycles.

Principle 5: Institutional Money Managers Provide Consistency

“With many advisors your plans will succeed” is a Proverb that we believe is especially true when it comes to investing. While many advisors use mutual funds, most employ a “generalist” approach. A typical High Yield Bond fund, for instance, will likely only have one or two money managers for the entire High Yield market. While this may sound adequate, the High Yield bond market of the 21st century is too expansive and complex for one or two people to sufficiently evaluate.

Portfolio Style Chart - Example

In contrast, we use specialized independent money managers to invest in each strategy – typically involving around 35-45 managers at any one time. These managers work specifically within their defined strategy, honing their skills and improving their results over time.

Additionally, these managers are required to maintain their specified strategies – risking replacement if they deviate – while being evaluated by their performance relative to their specific benchmark. This structure safeguards against the desire to chase returns while at the same time encouraging consistency and predictability over time.


Get Started

Your road to retirement or other important goals requires an investment philosophy that will get you to your destination. By affirming and holding to these principles of investing, Plan Financial can help you get there. If you agree with our investment philosophy and you would like to see how our disciplined process can help you accomplish your goals, we welcome you to discover the Plan Financial difference.