Questions Investors Simply Don’t Ask Themselves

I was inspired by this article from Michael James on Money recently that answered a bunch of questions investors simply don’t ask themselves, listed on Ben Carlson’s site A Wealth of Common Sense.  Given Michael is a successful index investor and my investing approach is different from his I thought I’d take a stab at answering Ben’s questions and see what’s different and by how much.  Ben’s questions are in bold font, my answers follow.  Please hang with this post, it’s longer than most.

What if I’m wrong?

I’m quite confident in my indexed product selections.  I’m also confident in my dividend stock selections for passive income.

What are this person’s incentives for giving me advice?

I ignore market forecasters although I do find them interesting.

What are the all-in costs for my portfolio?

The blended MERs for all the indexed products we own are about 0.12% per year.  My commission costs are about $200 per year to buy more ETF units or dividend paying stocks throughout the year.

What’s my reason for making this purchase or sale?

I find rebalancing challenging with my hybrid approach to investing, I won’t lie, indexing would be easier.  When new money is available, I seek out more purchases in companies to match the sector allocation of the TSX Composite Index striving for ~40% financials, 25% energy, 15% materials and industrials and 20% from other sectors like telecommunications.

Maybe I should give myself a few days before making this change to my portfolio?

I don’t feel l need any cooling off period for my investments.

What’s my time horizon on this investment?

Decades.  I plan to invest money in indexed products and stocks for as long as I live.

Does this strategy fit my personality or is it a case of a square peg in a round hole?

Although I intend to index invest more as I get older (and have already in 2015) I feel quite comfortable with my strategy.

When will I sell this investment?

My intended holding period is decades for any investment.

Have I looked at both sides of this trade?

I am not concerned about the short term consequences for any purchase.

How will I react if the markets don’t cooperate with my thesis?

My intended holding period is decades for any investment.  Personally, I like it when the markets correct.  It’s like shopping when things are on sale.

Am I saving enough money?

I hope so.  Our mortgage payments and lump sum payments take up a large portion of our after-tax pay.  This sucks.  Beyond our mortgage payments we’re trying to save 20% of our after-tax income every year.

Am I blaming others for this mistake instead of taking responsibility for my own actions?

I don’t blame others for things I am responsible for.

How much will this change in my portfolio really affect my performance?

Using indexing products, I can largely predict the long term returns for my portfolio.  Given the dividend histories of many companies I own, I can largely predict the passive income I may expect to earn in any given year.

What is my asset allocation including all of my investments?

My long term allocation goals are 60% equities, 10% REITs and 30% bonds/fixed income.  I consider my workplace pension my fixed income.

What’s my edge in these competitive markets?

I’m not sure I have one.  Indexing provides market returns less miniscule money management fees.  My Canadian stocks are largely tracking the returns of the TSX Composite Index for the last five years.

What does the party on the other side of this trade know that I don’t?

I know there are tens of millions of investors who are smarter than I am so I figure buy holding assets long term I don’t need to play the trading game.

Am I listening to the right sources when taking financial advice?

This is hard to answer because I’m biased.  I suppose if we’re not meeting our financial goals then our know my plan is failing.

What’s my maximum pain threshold for losing money?

I don’t know actually.  I know with the recent oil and gas decline I’m not worried.  I’m buying stocks instead.

Am I looking at the market value of my portfolio too often?

Yes.

Do I understand the risks and expected returns for this asset?

Long-term I’m banking on 3-4% real return for my portfolio. The yield on my investments (indexed products and stocks) is currently about 4%.  My hope is capital appreciation for my investments will match inflation, give or take 2-4%.

Could I explain my investment strategy in a 30 second elevator pitch?

Some “core” using indexed ETFs and some “explore” using Canadian and U.S. dividend paying stocks.  I try to reinvest all distributions and dividends paid every month and quarter.

Do I have a reasonable time frame in mind for my portfolio?

As long as I live.

What is the underlying liquidity in this investment vehicle?

The popular ETFs I own and the stocks I own I would think are pretty liquid.

What are the tax complications?

I put only Canadian dividend paying stocks in my non-registered account for favourable tax treatment.

I don’t have any tax complications for investments inside our TFSAs.

I’ll have to pay taxes (eventually) on money withdrawn from our RRSPs.

Am I being patient or just stubborn?

If I buy and hold my investments then maybe both?

Am I diversified enough?

Yes. I own thousands of stocks using the indexed products I own.  I own 25+ Canadian stocks from a variety of sectors.  I am very fortunate to contribute to a workplace pension.

What are the alternatives to this investment?

I suppose just to index invest everything 100%?

Will my assets cover my future liabilities?

If I work until I’m 65, absolutely.  However we want to retire earlier then no so we need to save and protect our human capital.

Do I understand the risks involved with this strategy?

I’m not sure my indexing strategy has major risks that are not well-documented.  In terms of owning many individual stocks, yes, I am aware these companies might not always achieve market returns nor are their dividends guaranteed.

What’s my investment philosophy?

Already mentioned above.

Am I trying too hard?

I don’t agonize over my portfolio so I guess the answer is “no”?

Does this person offering advice on TV have the same time horizon as I do?

I don’t watch much TV other than sports (e.g., golf, hockey, and football) a handful of TV shows and movies.

Am I anchoring to current or past price points?

No. I buy new investments if we have money after aggressively killing mortgage debt every two weeks.

Are this portfolio manager’s past results too good to be true?

I don’t invest with portfolio managers.

Am I allowing my confirmation bias to cloud my judgement?

I still have some biases related to the stocks I own, but that’s about it.

Am I the sucker here?

Buying and holding indexed ETFs? Buying and holding dividend stocks that have paid dividends and provided capital appreciation for decades?  I don’t think so but maybe I am.

Am I chasing past performance?

For the most part, yes, I am relying on the past performance of the stock market to provide similar returns in the future.  If the stock market does not continue to grow somehow long term I suspect all investors including me are doomed.

Am I imagining that past market scenarios were easier than they really were at the time?

No. There is always some new financial crisis around the corner.

Is this data important or just interesting?

I don’t think any short term data is that useful, maybe for day traders it is.

Am I working with a marketing firm or an investment firm?

No.

How did I react during past periods of market turmoil?

I bought stocks coming out of the 2008-2009 financial crisis.  I continue to buy stocks during this oil downturn.

Do I really understand my appetite for risk?

I’ve never really tried to quantify it.

Am I practicing first or second level thinking?

If second-level thinking about thinking for myself, being more objective and avoiding following the herd, I am getting better at this.

Does this person have my best interests in mind?

I would like to think most people have my best interests in mind but when it comes to the financial industry I’ve learned you’re largely prey for a massive marketing predator.

Can I stick with my process when things don’t go as planned in the future?

I think so but I have no idea what the future holds – a plan is good for a point in time – the process of planning is far more important to my wife and I.

Am I anchoring to a bad investment or staying disciplined to a good process?

There is some anchoring in my portfolio, I continue to hold a few stocks that have dropped in price, and I’m buying more of them every quarter.

What do you make of my answers?  Although the list of questions is long, take on the questions yourself and see how you do!

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28 Responses to "Questions Investors Simply Don’t Ask Themselves"

    1. I still liked your answers and I tried to keep them short as well. What I found interesting is because my approach is more complex (than yours) it takes more words to answer. Yes, many of the questions are designed to challenge traders. Count me out on that!

      Reply
  1. The nice thing about having a long timeframe is that I don’t have to worry about short term market fluctuations. Thats not to say I just buy things blindly but it helps knowing you can wait 15-20 years before the market starts to work its way back up again

    Reply
  2. Mark,

    The questions involving how I will react during the next market turmoil (30% drop) and appetite for risk interesting. I’m sure the feeling this time around will be heightened due to a larger investment portfolio and more substantial drop in dollar value when it happens again. That being said I am excited for another drop as it will help my investment portfolio returns over the next 30-40 years.

    Thanks for sharing,

    Robbie

    Reply
  3. Very useful post, thank you. As you point out, the questions about risk ( by far the most important in my opinion) are pretty much a complete mystery to newer investors who have not “enjoyed” several market cycles.

    Reply
    1. Risk is essential and tough to quantify sometimes. There is certainly some piece of mind that comes with investing in a manner that understands these market cycles will happen again.

      Reply
  4. That is a long list of questions!! I must admit, didn’t read them all (thought some were duplicate of others). I sure asked myself most of them at one point, but since I’ve set my 7 principles of investing, there’s not much questioning anymore. I have confidence in the rules I set myself so now I just move forward! 😉

    Reply
  5. re: “If the stock market does not continue to grow somehow long term I suspect all investors including me are doomed.”

    Disagree.

    Which stock market are you talking about?

    If your chosen stock market “does not continue to grow somehow long term” it doesn’t mean doom for all investors, it merely means you are using the wrong strategy for that given market. If you won’t change your strategy then you have to change your market.
    The same goes for James’ “If markets stop going up over the long term, the world is in trouble.” The North American markets are not the World, and the markets are not the economy. Wise to remember Buffett’s caveat — invest in companies you’d hold even if the markets shut down for ten years (i.e. no growth).

    Japan has had a top global economy for decades, yet their stock market “does not continue to grow somehow long term” (aka done nothing but decline over the last 25 years). Dismal failure for an indexer, yet probably fairly decent for an investor in the ‘real economy’ (its recent doubling was due to politics and financial engineering far more than actual market strength). I wouldn’t be so biased as to think the same couldn’t happen to the TSX; the S&P saw no growth between 2000-13, or about half of an equity investing lifespan.

    Applying a specific strategy (long) to a specific investment vehicle (TSX) will enforce specific limitations on your outcome; those outcomes, however, will not apply to all investors.

    Reply
    1. U.S. and Canadian markets SST.

      So, if a collection of a few thousands businesses don’t grow (collectively) long-term things will be OK?

      I’m not sure I follow your logic.

      The stock market provides the best, historically, chances of beating inflation. Inflation is a portfolio and thus wealth killer. If your assets are not growing you are effectively losing the war.

      This does not mean I don’t own companies that I would be happy to hold if the markets shut down completely, like Buffett said, but if the stock market does not grow, we are absolutely all in trouble. Let me know your counter! 🙂

      Reply
  6. Japan has held a top global economy for a very long time, yet its stock market has been in decline, also, for a very long time. Their economy seems to be just fine (aka not in trouble), their stock market is junk (aka trouble). What would you rather invest in? Does the never-growing stock market of the third largest economy in the world mean “we are absolutely all in trouble”? The businesses have obviously grown, wealth has and is being created, just not from the stock market.

    Japanese inflation has been in and around 0% for decades, yet their stock market has lost almost 3% per year over the last twenty-five. So much for the stock market beating inflation. The 1970-85 S&P 500 returns, adjusted for inflation, were 0% (i.e. no growth). The Japanese stock market returned 7.5%/yr as its inflation rate dropped from 7% to 1% (with a short spike over 20%).

    As I mentioned, you apply one strategy — long — to one market — North America — and this will limit your outcome. A stock market in decline is only in trouble for those who will not alter their strategy.

    A Japanese investor in 1990 could have started shorting the Japanese market, or piled his money into the U.S. markets, i.e. a change in strategy. The reverse holds true for a North American investor in the 1970’s.

    U.S. and Canadian stocks comprise only ~40% of the total global stock markets, and ~18% of total global financial assets. There are many alternatives to homebase bias investing. It’s great when you are winning, but then what happens when you hit a Japan-like scenario or another ’70’s decade and you keep sticking to your guns?

    Perhaps more questions to add to the list.

    Reply
    1. @SST: It’s true that individual countries’ stock markets have had long periods of low growth. Even a global portfolio of stocks will have periods of low growth. Of course, they will also have extended periods of high growth that exceeds the growth of the underlying economies. This is the nature of stock investing.

      While Mark’s individual stocks are limited to North America, he didn’t say which stock ETFs he owns. Perhaps he has said so elsewhere on hos blog. In any case, he could easily purchase foreign stock ETFs to create reasonable balance.

      When you say “A stock market in decline is only in trouble for those who will not alter their strategy,” you imply that we can know that a recent past decline will continue; we can’t. The majority of those who try to alter their strategy will end up making things worse, not better.

      Talking of making moves in the past just feeds our hindsight bias. It may be that there are some who can make profitable moves often enough to outperform through skill rather than luck. But these people are rare. The investor who buys and holds a low-cost diversified portfolio will outperform the vast majority of investors who think they are more clever.

      Reply
    2. Fair points SST about Japan. Looking back though, to any market, Canada, US, otherwise, it’s of course very easy to see and make sense of what has happened. As for the future, nobody knows. Your points raise a number of questions that could be added to the list.

      In the end, I’m going to take my chances that some U.S. and international ETFs combined with my 30+ individual stocks will continue to perform well long-term. I won’t know if I’m correct on my decisions until 30 years from now. So far the strategy is working well since I’m meeting my goals and in the end, isn’t that what matters? Thanks again for the comments. All perspectives welcome.

      Reply
  7. The answers are pretty much the same as mine. Live frugally and invest in more ETFs and dividend stocks. I am confident that this proven strategy will serve us very well year after year.

    Reply

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