Episode 525 – Investment Philosophy vs. Strategy

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker:
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you and joined as usual by my great friend and colleague, Certified Financial Planner™ and Market Leader here at Mercer, Mr. Jason O’Meara. Jay, thanks for joining me.

Jason O’Meara:
Of course, John. Happy to be back.

John Walker:
And Jay, I thought today we’d talk about something that I was raised by a family I got the pleasure of meeting with recently, and they started asking about our investment philosophy.

And it really resonated with me because I think in our industry we spend a lot of time talking about investment strategy, right? Things like asset allocation and diversification.

But this really resonated — investment philosophy — it’s a different conversation and it’s actually a different approach, right? When we start thinking about investment philosophy, we’re thinking about the set of core beliefs, right, that you have as a family that will help guide your plan, your decisions, and ultimately your investment strategy.

So, I thought today we would talk a little bit about how we approach that question, right? What’s the difference between an investment philosophy versus an investment strategy? You know, one’s sort of where the rubber meets the road. That’s your approach, and it’s really how you execute on your philosophy.

And so I thought we’d take a little time to do that, Jason. I know I’ve heard you explain this to families before and I think you give a really good sort of simple definition of what makes them different — that could be a good place for us to start.

Jason O’Meara:
Yeah, absolutely. It’s funny that we’re talking about this topic because I was actually just talking about this the other day with another advisor. And I’m going to let people in a little bit of my history as an advisor — you have to learn. Sometimes you’re learning on the job.

I remember my first year. I was very young in the business and I was asked by a client who I had no business talking to at that point in my career. The client had a lot of money. I was kind of intimidated being a first-year advisor, and he said to me, “What’s your investment philosophy?”

And John, I didn’t have an answer.

John Walker:
I was going to say you probably didn’t know.

Jason O’Meara:
I did not have an answer. I started rambling about mutual funds and how to pick funds and how to pick investments, and it was kind of a light bulb moment for me — I need to be able to answer that question.

Now, 17 years later, my answer is: my investment philosophy doesn’t matter. Your investment philosophy is what matters. What are your beliefs?

And I always say now that, talking strategy to philosophy — a strategy is the how. That’s the what are we picking? What funds, what individual stocks, what ETFs, or whatever we’re picking. That’s the strategy aspect of it. The philosophy is the why. Why are we picking these things?

What is guiding our choices? And why? You know, me personally, my own individual philosophy is I prefer to be more passive with my investments. I prefer more index-based investments. One of the reasons, John — to be very candid — is I work with executives of public companies, so I buy ETFs so that they don’t ever have to worry that I’m going to use insider information. I want clients to be able to talk — families to be able to talk to me about whatever — without worrying that I’m going to go trade on this and send us both to jail.

So I only buy ETFs. That’s just my personal philosophy. But with others, you may have very strong beliefs around not holding certain things in your portfolio, and we have to design around that.

John Walker:
Yeah, absolutely. I mean, I think one of the core ethos of the way we do things here at Mercer Advisors is this idea that purpose drives strategy, right? We spend a lot of time in the planning process understanding how this wealth supports you and your family and the values that underpin that.

And I think your definition is so simple and yet so correct, right? Your philosophy is your why and the strategy is the how.

Keeping it simple and straightforward and really underpinning your strategic approach with your core values allows you — from our experience — to stay on track, right? It helps you tune out distractions.

I’m sure every advisor in the world got a million questions about SpaceX and “should this be a part of my thing” and “what about all these flashy new IPOs.” And for a lot of families, that doesn’t actually align with their philosophy. So you can start tuning out that noise because it’s really not applicable.

When we can take people back — just like we always say on the show — to the plan and ask, does this idea that you’re considering align with your plan? This is a similar way to approach investments. Does this new idea you have from a strategic perspective, does it really align with your philosophy?

So maybe we can give a couple of examples to underscore the difference here. I’ll give you a good example, and it kind of sounds like it’s the way you think about things sometimes too, Jason.

My pops used to always say, “KISS — Keep It Simple, Stupid.” Don’t overcomplicate things that need not be overcomplicated. And so that minimalist approach can be a core philosophy of how you do things.

You said it — I don’t want to have to be picking individual stocks and bonds. That’s the philosophy that underpins the approach. And then the strategy is, yeah, you might be picking a broadly diversified portfolio of ETFs and mutual funds that aligns to that. You wouldn’t even consider some hot new IPO because that’s not aligned to how you think as a human about managing your portfolio.

Jason O’Meara:
Right, and to take that one step further — I’m a strong believer in keeping things simple and not chasing perfection in almost everything I do. And the reason I like to keep things simple is because the simpler you make it, the less room there is for mistakes.

So by not overcomplicating a portfolio and not having to buy 700 individual equities in order to replicate an index — that’s less that I need to manage, less that I need to worry about. That’s more time I get to spend doing literally anything else. I can think of a lot of other things I’d rather do than analyzing stocks and buying stocks. Keeping it simple in that regard just eliminates a lot of room for mistakes.

John Walker:
Yep, absolutely. That’s really important. Whether you’re doing it on your own or whether you’re doing it with the support of an advisory team, it’s really important to identify that that is a philosophy that is important to you — that that’s part of your core beliefs.

I’ll give you another one that we see a lot, Jason. How many times in your career have you been asked this question: how much cash should I have on hand?

Jason O’Meara:
About four times a week.

John Walker:
I mean, honestly — if I had a nickel for how many times we’ve been asked “how much cash should I have in my portfolio,” there’s truly no correct answer. Now we can make a really compelling argument for why holding cash isn’t great from a long-term investment perspective, but for a lot of people, that peace of mind of having ample liquidity — having a large cash cushion — that underpins a philosophy of saying: they are more comfortable knowing that they have enough cash to support their lifestyle for X amount of months.

That philosophy of “it’s important to me to have liquidity” — okay, that’s a philosophy that doesn’t necessarily align with a long-term investment strategy, but there’s the disparity. One is a philosophy and one is a strategic approach to investing.

Jason O’Meara:
And I’m actually going to disagree with you on that one, John.

I feel that having the right amount of liquidity actually does lend itself more to a long-term investment portfolio because, you know what, it’s going to keep your money invested. You’re not going to have to pull money out if something happens. You have this easily accessible bucket of money that allows you to leave your long-term bucket alone.

John Walker:
Actually, you know what, I love that — that’s a great counterpoint.

I think we would agree that historically cash is not somewhere you go for growth, right? Simply put, you’re typically giving up growth potential in exchange for liquidity. That’s typically how things work. Now, we’ve been in favorable interest rate environments where that’s not necessarily true — if yields on cash are favorable, it makes it even better.

But regardless of that, it’s important to understand: it’s okay as long as it fits within your plan. Because we need to understand your personal philosophy and what makes sense for you. Having some significant liquidity — if that is necessary for you to be happy, it’s really important that your portfolio aligns to that, and the strategic approach that your advisor recommends is accounting for that.

Jason O’Meara:
Right, and that allows your time horizon to maybe have a little bit more of an effect on your philosophy. We’ve talked on this podcast before about the bucketing approach, right? Have short-term money, mid-term money, long-term money — or more precisely, short-term investments, long-term investments, and somewhere in between.

If you’re able to leave your long-term bucket alone — that pile of money, maybe that’s your 401(k), maybe that’s an IRA, Roth IRA, money earmarked for 30 years from now — if you’re able to just leave that invested and not touch it, you’re going to see that money go up. We always joke: we want our charts to go up and to the right. You’re able to see that chart for that bucket go up and to the right, especially if you don’t interact with it too much.

Review it, make sure everything’s in line where it’s supposed to be, but what you don’t want to have happen — because that’s long-term money — you don’t want short-term noise to affect your process, right? We had a rough stretch in the market, investments are down. You don’t want to panic because that’s a long-term bucket.

You know, I’ve even gone as far as having families name their accounts. Like “John’s Retirement” — or “Little Johnny’s College Fund” — right, instead of Account X12345. And that’s a great way for people to be able to remind themselves: this is long-term money. I don’t need to panic.

John Walker:
You know, that’s such a great point, and I love that you do that, right? Because that allows people to say, let the purpose of that investment drive how you invest it. What you need that money for allows you to determine how much risk you need to take and how it should be invested.

The strategy: oh, okay, this is long-term retirement money — we’re going to be growth-oriented. And this bucket is for something I need in the next two to three years — we’re going to take a different approach that maybe has more liquidity.

So letting that purpose and time horizon guide how you invest it is the philosophy. And the approach — what’s the right portfolio to build within that bucket — that’s the strategy aspect of it.

You know, we see this a lot. You and I both live in “Vanguard territory,” right? We both live near Vanguard’s headquarters, so we have a lot of families we meet that are disciples of Jack Bogle and have kind of grown up in the business knowing his philosophies. One of his philosophies that many of our families share is: be mindful of costs.

Cost should be something that you’re aware of as an investor as you build your portfolio. You should be thinking about how much it costs to do that.

Now, conversely, we have plenty of families that don’t really look at that at all. They just want the top-line performance: “Did it do what it was supposed to do? Did it get me the number I needed? I don’t really care what it costs as long as I got the returns I needed.”

And you’re probably somewhere on that spectrum. But understanding what is important to you — or, is that a philosophy that you subscribe to — can be really important for you as an investor to understand. Or for your partner that you’re working with, your planner, your investment team — is this something that you think about? Is this something that drives your selection process?

Jason O’Meara:
And some of that ties to your belief around the type of investment that you are willing to be in. We look at active management versus passive management. If you’re in an ETF that’s basically replicating an index, there should be a low cost — you should be paying only a few basis points for that investment. If you’re paying more than that, you’re overpaying.

But if you’re someone who believes that Fund Manager X has the secret sauce and this person’s going to outperform the market over the next 10 years — understanding you’re going to pay 80 basis points for that — you might be okay with that because you think it’s going to outperform the index. Well, then that’s a different story. You’re willing to have that increased expense.

What’s that saying — “cost is only an issue in the absence of value.” If you think you’re getting value for that cost, you don’t mind paying it.

If you get into private market investments, those have really high fees, but if you’re in those and you’re expecting to outperform the greater market by a significant amount, you’re not going to be too concerned about paying 3% of your money when you’re expecting to get an average of 18% return. (Those, by the way, are just random numbers I pulled out of thin air — please do not take this as any sort of investment recommendation. It’s just an example.) If you think you’re going to get a massive return, you’re willing to spend a little bit more money to get there because it winds up being worth it. But not everybody believes that.

John Walker:
Exactly. And I think what it gets to is: the philosophy of that is how do you personally assess value? What does value mean to you? And I don’t mean value in the sense of value versus growth from a stock perspective — I mean, how do you equate value? Things come at a cost. Cost is what you pay, value is what you get. So how do you derive value? Where do you see it?

That is the philosophy that underpins how you approach investing. How you make that assessment is going to underpin how you invest.

I guess, Jay, I want to go back to something. I want to close with something you said at the beginning, which is one of your philosophies that I think at the end of the day often drives a lot of the conversations we have with families — and you said, “I don’t want to be spending time on small decisions, on the little things. I want to use that time for other things.” And I know you’d rather spend it with your wife and daughters.

So: get the big things right. The philosophy that drives your decision is — look, I’m not going to obsess over this ETF versus that ETF, or did I maximize my return on this fund versus that fund. You look at it at the big picture, 10,000-foot view and say: my plan is still on track. Am I still getting to do all the things I want to do? Am I still going to be able to retire? Am I still going to be able to fund these 529s?

The philosophy for you — and I think for a lot of families, once we start peeling back the onion, we find — listen, focus on getting the big stuff right. Stay on track with your plan. Maximize your income, maximize your savings. Stick to the plan. Stay steady with your consistent 401(k) contributions. The execution — the strategy — is how do I execute all of these things?

But at the end of the day, are you focused on the details, or are you focused on the larger principles of: “I just need to stay on track for my future”?

Jason O’Meara:
You’re absolutely right. Because honestly, what I’ve seen over my 17 years is the returns — while important — aren’t the biggest driver.

It’s important to get good returns. Don’t get me wrong, I’m not discounting returns one bit. But my activity — what I do — will have a larger impact on my financial plan success than any market growth, or vice versa.

Markets go down — we know that. That’s the only guarantee in the market: at some point it’s going to go down. But I make sure, like John, like you said, I make sure that I’m maxing out my 401(k). I make sure money’s going to my kids’ 529s. I make sure that when the market does go down, I am not panicking and jumping out — not dumping all my stock and saying, “I’m out. I’m going to wait for this to cool down.”

I’m actually the opposite. I ask my wife: how much can I throw in? How much can I put in right now? This is an opportunity.

So, you’re absolutely right when you say get the big things right. Just make sure that your activities are in line with your goals. Be your own benchmark. Don’t worry about what the S&P 500 did today. Just make sure that your activities are always moving you forward. What’s that — 1% better every day? Make sure you’re getting your plan 1% better every day.

John Walker:
And the philosophy that underpins that, right, is: keep it simple, stay focused on the big picture, and control what you can control. We cannot control the environment that we operate in. We can’t control the market. We can’t control the tax code. We can’t control all of these things. There are strategies to navigate it.

You or your advisor can help you determine the right asset allocation, the right underlying investments, the right passive versus active mix. Those are all the strategies that drive this.

But at the end of the day — what’s the philosophy that drives it for you? It’s critical that you come up with that for yourself, or work with a team like ours that can help you identify those handful of core principles that drive you and your family’s decision-making process.

Jason O’Meara, Certified Financial Planner and Market Leader here at Mercer Advisors, thanks for joining me today for what I think is a really important conversation.

Jason O’Meara:
Yeah, absolutely. I think a lot of people are getting a lot of help from this one.

John Walker:
And so if you have questions — if you are trying to identify what your core philosophies are, if you haven’t engaged in this conversation and want a little help — drop us an email at jwalker@merceradvisors.com or jomeara@merceradvisors.com. Along with Jason O’Meara, I’m John Walker, Regional Vice President at Mercer Advisors. Thanks so much for listening to the Your Life Your Wealth podcast. See you next time.

Announcer:
If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.