10 Questions to Help Define Your Investment Philosophy – A Wealth of Common Sense

There are a lot of ways to make money in the markets. Value, growth, index funds, active funds, dividend strategies,
factor tilts, “quality,” “momentum,” “I saw a guy on TikTok point at a chart,” etc. The list is endless.

The ways people lose money, though, are weirdly consistent: chasing whatever just worked, panic-selling when it hurts,
buying because everyone else is buying, overconfidence, and treating the market like it’s a personal enemy that needs to be defeated.
(Plot twist: the market does not know you exist. It’s not petty. It’s just chaotic.)

That’s why defining an investment philosophy matters. Not a slogan. Not a vibe. A set of answers you can lean on
when your portfolio feels like it’s doing parkour. Think of it as your “rules of the road”so you don’t end up making decisions with
your heart rate.

Below are 10 practical questionsin the spirit of the “A Wealth of Common Sense” approachto help you clarify what you believe,
what you can tolerate, and what you’ll actually do when things get messy. You’ll also get a simple way to turn your answers into a one-page
plan (an Investment Policy Statement) so your future self doesn’t have to improvise.

What an “Investment Philosophy” Really Is

Your investment philosophy is the logic behind your decisionsyour personal framework for how you build, manage, and stick with a portfolio.
It connects your goals (why you invest) to your behaviors (how you invest) and your boundaries (what you will not do).

• It’s not a prediction machine. No one gets one of those.
• It is a decision system that helps you stay consistent through market cycles.
• It should be simple enough to follow when you’re stressed, tired, or tempted by shiny headlines.

The 10 Questions

1) What is this money for?

Start with purpose. Retirement in 25 years? A home down payment in 3 years? A “sleep-well-at-night” emergency reserve? Different goals deserve
different portfolios. Short-term money shouldn’t be forced to cosplay as long-term money.

Try this: Label your accounts by goal (e.g., “Retirement,” “House 2029,” “Kids’ college”). Your allocation can change by bucket.

2) What does “success” look likespecifically?

“Be rich” is not a strategy. Define success in measurable terms: a target retirement age, a monthly income goal, or a savings rate you can
control. Most investing stress comes from comparing your portfolio to someone else’s highlight reel instead of your own plan.

Try this: Write one sentence: “I’m investing to ______ by ______, and I’m willing to accept ______ along the way.”

3) How much risk can you take… and how much risk will you actually tolerate?

Risk tolerance is your willingness to ride out losses without bailing at the worst time. Risk capacity is your ability to take risk based on your
financial reality (time horizon, income stability, obligations). They’re related, but not identicaland confusing them can get expensive.

Be honest: could you watch your portfolio drop 20%… 30%… 50%… and still stick to the plan? If your answer is “I would simply pass away,” your
portfolio might be too aggressive.

Try this: Look at your worst-case “sleep test.” If you can’t sleep, the allocation is too spicy.

4) What’s your time horizonand what’s your liquidity plan?

Time horizon isn’t just “I’m investing for retirement.” It’s also: when will you start withdrawing, how flexible is that date, and how much cash you
need for near-term expenses? A long horizon can support more volatility; a short horizon demands stability.

Try this: Keep near-term spending needs out of high-volatility assets. Match money timelines to asset behavior.

5) How will you build your asset allocation?

Asset allocation is your big-picture mixusually some combination of stocks, bonds, and cash equivalents. It’s one of the biggest drivers of risk
and return over time. The best allocation is the one you can stick with through bad markets, not the one that looks bravest on a spreadsheet.

A simple approach is often the most durable: broad diversification, appropriate stock/bond mix, and a plan to rebalance when markets shift.

Try this: Pick a target allocation and write it down (even a simple “80/20” or “60/40”), then decide how you’ll maintain it.

6) What’s your stance on diversificationand how broad is “broad”?

Diversification isn’t about owning “a bunch of stuff.” It’s about reducing the damage any single investment can do to your plan. Diversifying across
asset classes (stocks/bonds/cash), geographies (U.S./international), sectors, and company sizes can help smooth the ridewithout requiring you to
become a full-time portfolio curator.

Try this: If any one holding could derail your goals, it’s too big (or your portfolio is too narrow).

7) Are you an index investor, an active investor, or a hybridand why?

Passive investing (index funds/ETFs) aims to capture market returns at low cost. Active investing aims to beat the market through manager skill,
security selection, or timing. Both can work in theory, but the reason you choose matters.

If you go active, define your edge and your patience. If your edge is “I’m built different,” consider upgrading your evidence.
If you go passive, define how you’ll handle the inevitable periods when indexing feels boring, wrong, or “too easy to be true.”

Try this: Write your “why” in one paragraph. If it’s mostly emotion, tighten the plan.

8) How sensitive are you to fees, taxes, and friction?

Costs are one of the few investing variables you can control. Expense ratios, transaction costs, advisory fees, and taxes can quietly siphon off
returns over timeespecially when compounded across decades. Paying more doesn’t guarantee better results; it guarantees higher costs.

Try this: For every fund you own, know the expense ratio and the reason you’re paying it.

9) What will you do during a bear market (before it happens)?

Everyone has a plan until their portfolio gets punched in the face. The key question isn’t whether markets will dropthey will. It’s what you’ll do
when they do. Will you pause contributions? Sell to “wait for clarity”? Switch strategies? Or rebalance and keep going?

Your investment philosophy should include a “panic protocol.” Not because you’re weakbecause you’re human.

Try this: Pre-commit to rules: keep contributing, rebalance on schedule, and avoid major allocation changes during peak emotion.

10) How will you review, rebalance, and update your plan?

A portfolio isn’t a crockpot“set it and forget it” is only true if you also have a method to keep it aligned. Rebalancing is the routine act of
bringing your portfolio back to target when markets push it off course. Reviewing is checking whether life changes require a new plan.

The goal isn’t to tinker; it’s to maintain alignment with your objectives. Most investors don’t need more activitythey need more consistency.

Try this: Choose a cadence (e.g., annually) and a threshold (e.g., rebalance if an asset class drifts 5%+ from target).

Turn Your Answers Into a One-Page Investment Policy Statement (IPS)

An Investment Policy Statement is a written guide that documents your goals, risk parameters, target allocation, and operating rules.
It’s helpful because it moves decisions from “How do I feel today?” to “What did I decide when I was calm and rational?”

What to include in a simple IPS

• Purpose: What the money is for (goal and timeline).
• Risk profile: Tolerance + capacity, plus “sleep test” limits.
• Target allocation: Stock/bond/cash targets (and any international exposure rules).
• Contribution plan: How much, how often, and where new money goes.
• Rebalancing rules: Time-based (annual/quarterly) and/or threshold-based.
• Investment selection rules: Index vs active, fee limits, diversification standards.
• Tax considerations: Account priority (401(k)/IRA/HSA/taxable) and turnover awareness.
• When you’ll change the plan: Major life events, not headlines.

A quick worksheet you can copy

Common Traps This Philosophy Helps You Avoid

• Performance chasing: Buying what’s hot after it’s already hot.
• Overconfidence: Confusing a good outcome with a good process.
• All-or-nothing thinking: Going 100% risk-on, then 100% risk-off.
• Planless investing: Letting headlines and feelings run the portfolio.
• Fee blindness: Ignoring small percentages that compound into big dollars.

Real-World Experiences: of “Yep, That Happens”

To make these questions feel less like a worksheet and more like real life, here are a few common investor experiencescomposite stories that reflect
patterns many people run into.

The “All-Stock Hero” Who Didn’t Know They Were a 60/40 Person

Someone builds a portfolio that’s 100% stocks because “I’m in it for the long run.” For a while, it feels geniusmarkets rise, balances climb, and the
investor starts believing they’ve unlocked the cheat code: courage.

Then the market drops hard. Not a cute dip. A real, “Why does my retirement account look like it fell down the stairs?” kind of drop. Suddenly the investor
realizes they weren’t just buying returnsthey were buying volatility. And volatility comes with emotions, not just numbers.

If that investor had answered Question #3 honestly (risk tolerance) and Question #9 clearly (bear market plan), they might have chosen a stock/bond mix that
still supports long-term growth but doesn’t trigger panic. The “best” allocation isn’t the one that wins arguments onlineit’s the one you can live with.

The “ETF Collector” With 27 Funds and Zero Clarity

Another investor loves research and keeps adding funds: a little tech ETF here, a dividend ETF there, a “low volatility” fund (that still drops when stocks
drop), a gold position “just in case,” and something called “NextGen Quantum Cloud Robotics” because the name sounds like the future.

The problem? They can’t explain what the portfolio is trying to do. There’s no coherent asset allocation (Question #5), no clear diversification rules (Question #6),
and no idea how to rebalance without turning it into a weekend project.

A defined investment philosophy would simplify the whole thing: pick a broad stock exposure, a broad bond exposure, decide on international, and use a small
“fun money” sleeve if you enjoy experimenting. Complexity should be earnedand most of the time, it’s just expensive entertainment.

The Tax Surprise Nobody Brags About

A third investor trades more in a taxable brokerage account because it feels productive. They’re “doing stuff.” Then tax season arrives, and the investor learns
an annoying truth: frequent selling can generate taxable gains, and holding periods matter. Short-term gains may be taxed less favorably than long-term gains.

This is where Question #8 (fees/taxes/friction) and Question #10 (review rules) save you. A good philosophy doesn’t just chase returns; it respects after-tax,
after-fee outcomes. Sometimes the smartest move is to do lesson purpose.

The Quiet Win: The Investor Who Stuck to Boring Rules

Finally, there’s the investor who set a reasonable allocation, contributed consistently, rebalanced once a year, ignored most market noise, and kept costs low.
It wasn’t flashy. They didn’t “win” every conversation. But over time, their results looked suspiciously good.

Their superpower wasn’t predictionit was consistency. They used questions like these to build a philosophy that matched their life, then followed it
long enough for compounding to actually compound. In investing, the quiet habits are often the loudest results.

Conclusion: Your Philosophy Is a Promise to Your Future Self

Defining your investment philosophy isn’t about being perfect. It’s about being prepared. Markets will swing. Narratives will change. New “can’t-miss” trends will
show up right on schedule. But if you’ve answered these 10 questionsand turned them into simple rulesyou’ll have something most investors don’t:
a plan that can survive your emotions.

And if you take nothing else away, take this: you don’t need to outsmart the market. You need to avoid outsmarting yourself.