On Thursday, November 3rd @ 7pm CDT – I will be hosting a free webinar to teach my investment process. I wanted to use this week’s newsletter as an opportunity to give you an overview of it, in case you can’t make it.
The best way to describe my investment strategy is like guiding a large vessel. And adjusting the sails when necessary.
Based on observations of societal and economic trends, I have an idea of where the economy – and ultimately the stock market – are headed. So I invest accordingly. Which includes making adjustments as necessary and managing risks, in case I’m wrong.
Here, I provide my core investing beliefs and part 1 of my process. To learn the full process, you can register for the webinar here:
Webinar Registration – Reflective Wealth Investment Process
CORE BELIEFS
The power of human ingenuity
Throughout history, mankind has created solutions that not only help us adapt to change, but also create ways to profit from it. Therefore, the economy has always moved onward and upward over time, despite the occasional recession. At the core of my strategy, this is what I am investing in.
Efficient markets
Just like any market, the stock market is simply a collection of people buying and selling stuff. This buying and selling is based on known information. And in the digital age, everyone has instantaneous access to it. Therefore, this information is immediately reflected in stock prices. Because advantages are so rare, I believe it is impossible to consistently predict short-term market movements.
Patience and discipline
When we invest in the stock of a company, we become an owner in that business. Therefore, investing requires a business owner mentality. Good business owners complete rigorous due diligence before starting a business. Then, they commit. They do not bail out, just because of a temporary rough patch. Nor do they take the profits and run, after a good stretch. Same with investing. Invest in what you understand, with long-term conviction, only adjusting when necessary.
PART 1 INVESTMENT PROCESS: Core Allocation – Index Fund
The first step is owning a well-structured stock market index fund. All investing is a form of speculation. Risk levels can vary widely, but investing can be boiled down to buying stuff we believe will be worth more in the future. Since we cannot predict the future, we are speculating on it.
With this understanding, I am comfortable betting on the power of human ingenuity and its potential to continue driving the economy forward. Given the proliferation of index funds, it’s very easy to do this. A well-structured stock market index is simply a reflection of the underlying economy.
For example, the S&P 500 has historically been a good representation of the US economy. “The S&P” is made up of many sectors of the economy, based on the Global Industry Classification Standard. Over time, its composition changes to reflect changes in the economy.
Let’s look at a couple examples that help illustrate this point:
Energy Sector: As of February 2022, the energy sector accounted for about 3.7% of the overall S&P 500. Pretty small. However, this was not always the case. As recently as 2008, the energy sector accounted for approximately 17% of the overall S&P 500.
Telecom Sector: Today, the Telecom sector doesn’t even exist. Back in 1990, it was a meaningful component of the S&P 500 at around 10%. But in 2018, it had fallen to less than 2% and was replaced by the Communication Services sector.
The point? The economy evolves. Companies will fail. Industries will fail. That’s because new companies and industries are thriving. A good stock market index is designed to adapt and thrive as well. This is why – just like the economy – “the market” has always gone up over time, despite brief setbacks.
So the first – and most important – step in my investment process is to own an appropriate stock market index fund. History tells us that this – along with the patience and discipline to stick to it – would provide better results than the vast majority of professional money managers.
Go Global
I like to use an index fund that represents the global economy.
For one, it provides better diversification and a potentially smoother ride. The US and International stock markets have typically moved in cycles. And we’ve been in a cycle of US outperformance since the 2008 Financial Crisis. If history is any guide, we could go through an extended period of international stock outperformance. So having a global allocation provides better strength and reliability.
Additionally, we are living in an age where the world enjoys more connectivity across borders than ever before. And I believe this is only going to increase. I want my portfolio structured based on what is going on in the world today.
My preferred choice is the Vanguard Total World Stock ETF (VT). If you’re so inclined, Vanguard has a great write-up on global investing that you can access here.
Once this core position is in place, the next steps are:
1 – Ensure adequate liquidity, so you don’t have to sell your investments during a major downturn.
2 – Add exposure to emerging industries that can potentially increase your longer-term returns.
I’m looking forward to sharing all of it on the webinar! Again, Thursday November 3rd @ 7:00 PM CDT.
Have a great weekend!