Investment Philosophy

At Lewis Wealth Management, our investment philosophy is based upon certain underlying principles:

Investing, not speculating

Investing creates real wealth. This wealth is created when natural resources, skilled labor, intellectual capital, and financial capital is skillfully combined in an enterprise to generate profits. As investors, we want to capture some of that wealth and make it our own. We do this by providing the financial capital part of the equation. We can provide this capital in exchange for an equity interest (stocks) or as a creditor (bonds). When we hold stocks, we expect them to appreciate in value and, in some cases, receive dividend income. When we hold bonds, we expect periodic interest payments and eventually the return of our original capital. This is how capitalism works, and it has been working very well for a long period of time. The bulk of personal financial wealth in the world has been created through this time-tested process.

Speculating is not investing. It involves making a bet against someone else that the value of something is going up or down, usually on a short-term basis. Because there are two sides to every bet, there is a winner and a loser. It’s a zero-sum game. At the end of the day, no real net wealth is created, other than those who receive a fee for making the market where the participants place their bets. Of course, there is value to speculation because it can make our markets more efficient, but as we have learned recently, this is not always so. To win as a speculator, you must be right many more times than you are wrong over a long period of time. This can be a very daunting and expensive task.

Not all speculation is bad, and not all investing is good. That being said, we have a much better chance of financial success when we act as long-term investors the great majority of the time, and occasionally use a small amount of conservative speculation to hedge our bets and reduce volatility.

Are you investing or speculating?

It is important to recognize when we are investing versus when we are speculating. For example, when we try to time the markets by selling stock mutual funds because we think the market will go down this year, we are speculating. When we buy and hold a stock mutual fund because we believe that the companies inside the fund will grow and prosper over a long period of time, we are investing.

Diversification – Playing Good Defense

Diversification means not having so much of one thing that we make a killing, but also not being killed by any one thing. A properly designed investment portfolio must be properly diversified. On the equity side, it should contain hundreds of different stocks of companies in the US and abroad. On the bond side, it should contain many different types of bonds (government, municipal, corporate, mortgage, etc.) with different maturities and currency denominations. In more sophisticated investment portfolios, additional diversification can be achieved by adding asset classes like real estate and commodities because these asset classes have not been closely correlated with stocks and bonds over long periods of time.

“Diversification is the only free lunch in the investment business and it is the best defense against taking devastating losses in your portfolio.”

The danger of concentrated positions.

A lack of diversification in an investment portfolio can be very dangerous to your financial health. There are many painful examples. Like the ex-Enron employees who had 100% of their 401(k) in Enron stock. Or, the investors who loaded up entirely on technology stocks just before the tech bubble burst in early 2000. Or, the bondholders who had substantial positions in Lehman Brothers in 2008. The list goes on.

Asset Allocation – Staying Disciplined

Asset allocation involves investing your portfolio among several different asset classes. Since each asset class performs differently (i.e. when some asset classes are up, others may be down, etc.), the overall volatility of your portfolio is reduced. Asset allocation also enhances portfolio diversification beyond holding stocks and bonds and therefore the overall risk is reduced.

Designing an asset allocation for a client is both an art and a science. A properly designed asset allocation must be carefully matched to reflect your unique financial objectives and tolerance for risk.

Asset allocation also provides vital investment discipline through the rebalancing process. Properly executed, the rebalancing process helps the investor buy into an asset class when it’s undervalued (buying low) and sell an asset class when its overvalued (selling high). Of course, emotionally it’s not always easy to buy something when the value has fallen or sell something when the value has increased, but it is the right thing to do in the long run. Unfortunately, most investors do the exact opposite. They buy stocks when they notice the market has had a significant run only to realize that they bought at the top of the market. Then they wait to sell until the market has peaked and decreased in value.

“A properly designed asset allocation strategy will help you both build and protect your wealth.”

Endowment Style Investing.

Asset allocation allows you to play good offense and defense. The world’s best institutional and ultra high net worth investors have been successfully using asset allocation for many years. Endowments such as Harvard, Yale and Stanford use asset allocation for their portfolios. Many of these strategies have been unavailable to most investors until now. Recent market innovations make it possible for all sophisticated investors to gain access to asset classes such as real estate, commodities, and alternative investments to construct an asset allocation that goes well beyond the limits of a stock and bond portfolio.

Risk Management – Building Wealth, not Risk

In order to build real wealth over time, it is critical to reducing the amount of volatility in your portfolio. Take the following example:

Year 1 ReturnYear 2 ReturnAverage ReturnCompound ReturnValue at End of Year 2
Portfolio 1-50%50%0%-13.4%$75,000
Portfolio 2-10%10%0%-0.5%$99,000

Source: Dimensional Fund Advisors

Notice how the average return in both Portfolio 1 and Portfolio 2 is the same, but look at the difference in the compound return and end dollar value of these portfolios.

As you can see, volatility plays a significant role in determining a portfolio’s compound return, which ultimately affects value. That is why portfolios should be designed to specifically reduce volatility. By doing so, an investor can receive a higher compound return and greater wealth at the end of the day.

Asset allocation is the best strategy to reduce overall portfolio volatility since the asset classes perform differently. In fact, if a very volatile asset class is added to the allocation, and its returns are not correlated with the other asset classes, the overall volatility of the portfolio may actually be reduced.


Managing volatility is particularly crucial during a market downturn. After the recent bear market in 2008, investors who had properly managed risk have, for the most part, recovered. Others who suffered large losses may never recover.