Developing an investment philosophy: Why you need a plan before investing

It's December 2021. Your portfolio is up 35% in a year. You feel like a genius. Then comes 2022 – a bear year. Suddenly you lose 25% in 12 months and you sell your best positions because fear increases. A year later, these positions would have returned 40%. The problem? They had no philosophy. They only had emotions. An Investment Policy Statement (IPS) is the answer.

What you'll take away from this article

How to understand what is an investment philosophy? and use it for your capital strategy
How to understand the four pillars of an investment policy statement (ips) and use it for your capital strategy
How to understand why an ips improves performance and use it for your capital strategy
How to understand building a simple ips for private investors and use it for your capital strategy

What is an investment philosophy?

An investment philosophy is a written, structured document that defines:

Your investment goals (e.g. “6% real return p.a.”)
Your Asset Allocation (e.g. “60% stocks, 30% real estate, 10% bonds”)
Your Rebalancing rules (e.g. “Rebalance monthly if deviation >5%)”
Your behavioral protocols (e.g. “Do not sell at -20% drawdown”)

The problem: 73% of investors without such a document underperform consistently. They invest opportunistically, buying what's hot and selling when fear sets in.

The four pillars of an Investment Policy Statement (IPS)

1. Define clear goals
“I want to be rich” is not a goal. One goal is: "I want to have €5 million in 20 years, starting with €2 million capital, which corresponds to a 6% p.a. return."

2. Determine asset allocation
Based on your goal, you define the allocation. If 6% return is enough, you don't need 100% stocks (which means 20% volatility). You could use 50% stocks, 30% real estate, 20% bonds and still achieve the goal with less volatility.

3. Define rebalancing rules
“I rebalance monthly” vs. “I rebalance when an asset class deviates >10% from target” are two very different rules. The second is more flexible.

4. Define rules of conduct
That's the psychological component: »In a -20% drawdown, I don't do anything. In a -30% drawdown I buy additionally.« These rules prevent emotional decisions.

Why an IPS improves performance

Research shows:A written investment policy statement improves long-term performance by an average of 2-3% p.a.

The reason is psychological: During a market crisis (2020, 2022), you can read your IPS and remind yourself that you should not sell. The IPS becomes an emotional brake.

During a bull market, you can use your IPS to realize and reallocate profits - rather than remaining greedy and hoping for even more returns.

Building a simple IPS for private investors

You don't need 100 pages. A 2-3 page IPS is enough:

Page 1: Goals & Horizon
»My goal is €5 million in 20 years with €2 million starting capital. This requires a 6% p.a. return. My time horizon is 20 years. I won’t be able to make significant withdrawals until 2045.”

Page 2: Asset Allocation & Rebalancing
»My target allocation: 50% global equities, 30% real assets (real estate + timber), 20% bonds. I rebalance quarterly or when an asset class deviates >10% from target.«

Page 3: Rules of conduct
»At -10% drawdown: No action. At -20% drawdown: I check my IPS and confirm that I am not selling. At -30% drawdown: I add 10% capital (if available).«

73% Investors without IPS underperform

+2-3% Performance boost through IPS

20+ years Optimal planning horizon

4x/year Recommended IPS Reviews

IPS vs. Ad-Hoc Investing: Long-Term Performance

20-year average with the same starting allocation

Emotional Selling in Bear Markets

With vs. without written IPS

Quellen & Studien

Swensen, David: “Pioneering Portfolio Management” (2000)
Ellis, Charles: “Winning the Loser’s Game” (2017)
Academic Studies on Portfolio Management

We help you optimize your portfolio

Let us check with your asset manager whether you are using the optimal strategies.

Kostenloses Gespräch vereinbaren

Daniel Huber

Gründer & CEO von CANVENA | 215 Mio. USD Track Record

Your advantage after this article

What you now know — and how to use it

You know the core concepts and can apply them directly to your situation
You know which mistakes to avoid — saving you time and capital
You understand how this building block fits into your overall strategy

Your next step: Have your situation professionally assessed — free and non-binding in an initial consultation with Daniel Huber.

Sources & Further Reading

This article is based on a review of leading expert literature and curated primary sources from the CANVENA source matrix — more than 60 core books and 120 online resources across all relevant fields from capital intelligence, family office, strategy and valuation.