At Life Sherpa, our investment philosophy gives our work focus and meaning. In just ten firm rules, we have enshrined those beliefs we hold dear to provide our members insight into how we manage our own money and theirs. It shows how we are different, why that matters and demonstrates the inherent value in our approach.

This philosophy is guided by a century of data, research by Nobel Prize-winning economists and the decades of experience of our founder, Vince Scully.

1. The capital markets work (most of the time)

The capital markets are highly efficient at pricing investments, and these prices reflect the expectation of all market participants. But they are not perfect, are subject to booms and busts and can remain irrational for extended periods. But they are mostly efficient most of the time and so it is tough for an individual investor to outsmart the rest consistently.

2. To get a return you need to accept risk

All investing involves risk. Returns are the reward for the risk we take. No, it doesn’t guarantee a return; it wouldn’t be risk if it did.

Risk and return are related – if you want a higher return, you need to accept higher risk. The secret to success is to ensure that each incremental unit of risk you take gets rewarded with additional return.

3. The majority of your returns and risk are driven by your asset allocation.

The biggest driver of investment returns is the type and mix of assets you choose. In other words, how much you invest in shares is more important than the amount you allocate to (say) Telstra. We call this asset allocation.

Generally, if you target a higher return, you need to accept a higher level of risk. If you are not prepared to take an appropriate level of investment risk, you may need to save more or invest for longer to achieve the same goal.

4. Diversification is the only “free lunch” when it comes to investing.

Diversification is the act of spreading your investment risk around. Winning investment portfolios hold a mixture of shares, bonds and real estate distributed between geographies, currencies and industries.

It’s not just about the number of investments, though. It’s more about the nature of the assets – they need to behave differently as well.

5. Focus on the things you can control.

You can’t reliably predict the future of markets so you need to focus on the things you can control. Plan, prepare and protect when it comes to everything else. Don’t try to predict if and when an event might occur – ask instead what you will do if it does happen.

Accordingly, focus mainly on minimising both tax and costs.

Low-cost index funds, in general, provide superior after-fee returns to actively managed funds engaged in stock picking or market timing.

However, appropriate indexes or products that track them may not be available for all assets. You don’t need to choose between ‘active’ or ‘indexed’ — each has its place in your investment portfolio.

6. Consistent Outperformance Is Rare

There is a vast body of research that tells us that where individuals or fund managers do deliver outperformance, it is mostly down to luck rather than skill.

7. Outperformance is not a goal in itself

As an individual investor, your objective is to achieve the life goal you have identified, seeking to beat the market is not a meaningful goal.

8. You can’t know more about the markets than the professionals, but you can know more about yourself

Your behaviour is the difference between success and failure when it comes to investing. Letting your emotions drive your decisions leads to buying more when markets are booming and selling in busts – this is the opposite of buy low sell high.

You may not be able to know more about the markets than the professionals do (and if you do, it might be illegal), but you certainly can know more about yourself. This knowledge is the key to long term investment success.

9. Education Matters, but overconfidence and hubris are deadly

If your advisor does their job well, you should be able to explain in your own words what you are investing in and why, as well as how your investments work to help you achieve your goals. Because with knowledge comes understanding, and with understanding, confidence.

Overconfidence, on the other hand, leads to excessive trading, which destroys returns.

That’s why our role as your advisor is as much guide and coach as it is investment manager. Your Sherpa is here to educate and support you, to prepare you emotionally for market highs and lows, and to keep you on track to achieve whatever financial summit you decide.

10. Ongoing management matters

Over time markets change, regulation changes, managers change, styles change, funds choose to change the index they track, and your circumstances may change. All of these events may require a change to your asset allocation or choice of fund.

Markets move in cycles, and these cycles are notoriously difficult to pick. After a period of above-average returns in one asset class, it makes sense to rebalance into others and so lock in profits and reduce risk.

Choosing ongoing management ensures that these are all considered at the appropriate time, and demonstrably adds significant value over time.

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