Last week’s blog post covered a few lessons I’ve learned in investing, and in that post, I mentioned the ongoing work we have done on our investment beliefs and investment process. Many investment advisors reference their investment process – often in the context of how their process helps them achieve better results – but discussion about beliefs is less common. We think the two go hand in hand, and beliefs inform process – you can’t have a considered process without beliefs.

Investment Advisor

What are investment beliefs? We think they are broad-based ideas about how the capital markets function and how investors should approach the markets. Formulating and stating these beliefs provides the individual investor or investment advisors the foundation on which to build an investment process and portfolio. Here are a few examples of beliefs and the implications in forming a process:

The higher the fee, the greater the likelihood of underperformance – This belief would lead to an investment process that focused on fees in choosing investment vehicles. It would almost certainly preclude investing in hedge funds, which are typically extremely high cost, and it might preclude investing in actively managed funds – or at least high cost actively managed funds –  as well.

Contrarianism is needed to outperform the market – An investor who believes that following the investing herd will, at best, only provide average returns would work to formulate her own beliefs. That might mean finding less common (but hopefully more insightful) sources of information as opposed to a daily diet of chasing the latest headlines in WSJ or faithfully watching CNBC. It would also likely mean having the fortitude to ignore the herd mentality at market extremes, which can be extremely challenging.

Tax minimization is critical – A process focused on tax minimization might include screening for funds that have low embedded capital gains, an emphasis on placing tax inefficient investments in tax-advantaged accounts and the use of investments that are generally tax efficient. While tax minimization is useful for most investors, it is critical for investors in high-income tax brackets.

Regardless of whether you are investing on your own or hiring an investment advisor to manage your investments, having clearly stated investment beliefs is key. Make sure you understand what those beliefs are before moving forward with investing.