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Ferri: 3 Keys to a Successful Investment Strategy

Portfolio Solutions' Rick Ferri discusses how investors should incorporate a philosophy, a strategy, and discipline when managing their portfolios.

Benz: Rick, you are currently working on a book, and you have focused on what you see as the three key tenets that every investor should follow when managing his or her portfolio. Let's cycle through those and talk about the concepts for each of those?

Ferri: Sure. So, my view of a successful investment strategy or being a successful investor relies on three key principals. First thing we need is a philosophy, which is a belief about what happens in the markets. You could believe that there are active managers out there and you can find them and you can hire them and they are going to outperform the markets or you could believe that you can move money between asset classes at appropriate times and you can get a better return than just being in the markets. Or you may believe in a passive approach where you are a strategic holder, meaning you are going to set up a portfolio of stocks and bonds based on your specific needs. So, you might have 60% stocks, 40% bonds over the next 10 years, and you're going to rebalance. These are philosophies about the markets and maybe don't believe that you can outperform the market, so you are going to use all index funds or exchange-traded funds, and that's your philosophy.