A process to make smart investment decisions

7th December 2011

In the preface to the fourth edition of The Intelligent Investor, Warren Buffet states that to invest successfully over a life-time does not require a stratospheric IQ, unusual insights or inside information.

What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.

Source: Flickr – Josef Grunig

At Fortitude, we agree with this point of view and have developed our own sound intellectual framework, which is based on six key guiding principles:

1. You must have a plan
Investment decisions should only be made in the context of a financial plan, which identifies the return that you need from your investments in order to achieve your financial goals. The investment strategy should be designed to generate the returns required to achieve those goals with the least risk to your capital.

2. Risk and return are closely related
You cannot achieve a higher return without taking on more risk – there is no such thing as a free lunch.

3. Diversification is an essential means of managing risk
Investment portfolios should be diversified across asset classes and markets.

4. Asset allocation determines portfolio performance
Deciding what proportion of a portfolio should be invested in each of the key asset classes is the main factor in determining how an investment portfolio will perform.

5. Investment markets are efficient enough
Trying to beat the markets by using expensive, actively managed funds inevitably involves taking on more risk, which is rarely justified by the corresponding gains . Again, Warren Buffet agrees with the principle, stating in a letter to his own shareholders in 2007: Most investors, both institutional and individual will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

6. Costs matter
Charges and taxes can have a serious impact on your wealth. The charges applied by the majority of investment funds are eye-wateringly big.

Fortitude Financial Planners do not have access to a crystal ball. What we do have is an efficient and effective process which helps our clients to make smart investment decisions.