How to become a better investor (in 5 easy steps)
This blog draws inspiration from a variety of sources. For example, we all know we need to save early, save often; keep saving for investing purposes and then stay invested for the long haul. Easy to say. Hard to do.
I used to tinker with investments in my Registered Retirement Savings Plan (RRSP) during my 20s. Chase this hot mutual fund; chase that one and totally sabotage my portfolio.
Since I’ve started this blog some things have changed. For one, I’m older and maybe (?) a bit wiser when it comes to money management. Two (and this is a big one), I’ve learned more about myself. I’ve learned about what keeps me motivated and engaged. This means when it comes to money management stuff – my wife and I are wealthier for it.
I recent read this article authored by the folks at Steadyhand Investment Funds – Five essential elements to being a better investor. It was originally published in 2013 and it was updated earlier this year. Today’s post will provide some commentary on each Steadyhand element in that article, and how well we’ve adopted these in our financial plan.
- Be realistic
How true. This advice has stuck with me for many years. From the article:
“We suggest following the Goldilocks approach when setting long-term return expectations—plan for returns that are not too high and not too low.”
When it comes to our portfolio we’re assuming our 100% equity allocation should yield about 3-4% real return (after inflation is accounted for) for decades to come. If this is too high, we won’t be gravely disappointed – I don’t believe we’re shooting for the moon here – expecting 3% returns. If this is too low, and more than 4% occurs we’ll be ecstatic because we’ll have a modest amount of money to enjoy in our 50s and beyond.
We have absolutely no expectations about any bond yields in the coming decades – given where they are today thanks to prolonged dirt-low interest rates.
Our realistic expectations mean one of our desired end goals, owning a $1 M investment portfolio, should churn out at least $30,000-$40,000 per year, for life.
- Have a long-term plan
We do, although it should be more clearly documented for my wife and I. Through this blog I document our investing horizon, opportunities and risks, retirement goals and spending needs, sources of retirement income and much more. I also consider something far more important than money from time to time, that is, how are we going to spend our time and energy in retirement. I believe there is no use in working towards any one destination without broader goals in mind.
- Commit to a routine
Maybe to a fault! The folks at Steadyhand write about the concept of rebalancing in this section, to reinforce with investors the importance of this effort. Re-balancing your portfolio helps ensure you always have the appropriate strategic asset mix aligned to your long-term plan. This is helpful on two fronts: your plan remains in check and through strategic decisions you take the emotions out of investing.
The way our portfolio is designed, I feel I have less to worry about. Our routine is downright boring.
We buy and hold and reinvest dividends paid from most of our Canadian and U.S. stocks. I rebalance our portfolio a few times per year by buying more assets (stocks) when I feel the price is right; hopefully close to 52-week lows. Otherwise I let cash build up from dividends paid that could not be reinvested every month or quarter. We use this money to make new ETF purchases. On that note, we buy and hold low-cost Exchange Traded Fund (ETF) units over time for extra portfolio diversification. These purchases occur only a few times per year to keep our transaction costs low.
- Prepare for extremes
We’re trying to and ready to. From the article:
“Wall Street makes its money on activity. You make your money on inactivity.” – Warren Buffett
That’s our plan. Buy, hold and basically do nothing except reinvest dividends the coming months and quarters. This approach is not making our discount brokerage very wealthy but I do see our bank account rise in value with time. I’ve largely learned to train my investing brain and accept market extremes. This includes celebrating market lows or falling stock prices as excellent buying opportunities.
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- You’re the CEO
Damn right. As the CEO of our portfolio, our biggest role is to remain in charge; to diligently monitor what we’ve put into place. We’re far from perfect savers and investors. But we have however done some things right to amass a personal investment portfolio now valued at over $500,000 excluding our pensions.
As CEOs of our portfolio we know what we own, why we own it; we try not to deviate from our plan and we know almost to the dollar whom we owe money to for day-to-day expenses. We’ve got a ways to go to reach our financial goals but we’re on our way largely to taking control over our hard-earned money. Nobody cares more about our investing success that we do. You should feel the same about your portfolio.
How to become a better investor is not rocket science but it does take discipline, practice and time to hone your craft. You will make mistakes and learning is a lifelong journey – money management is just one example of that.
Steadyhand’s Five essential elements to being a better investor was a positive reminder we’ve embraced many of these elements already. We’ll need to keep following these elements for many years ahead to be successful.
What’s your plan? What do you make of these five steps or elements to become a better investor? What other steps do you feel you need help with? Let me know in a comment below.