Inspired by an article written by Tom Bradley here, Tom highlighted what academics and investing gurus have witnessed for years: investor returns remain far worse than the products they invest in.
Why the heck is that?
There remains a ‘Behavior Gap’ investors simply struggle to overcome. This is because investors are irrational and flawed human beings, and we’re all guilty of it to some degree.
I’ve learned to change my investing behaviour over time and largely stay with the same plan I developed seven years ago. This plan is simple to understand and straightforward but simple doesn’t always mean easy.
After reading Tom’s article I decided to respond to some of the points he encouraged readers figure out. Here are my responses.
- Have a plan
My approach to investing has been listed below on this site for many years and has not changed.
Dividend Investing. I invest in many Canadian and U.S. dividend paying stocks that provide income. We intend to live off some of that income within 10 years – the income will pay for the majority of our living expenses. (It can already pay for our property taxes and all utility bills for the rest of our life).
Index Investing. I invest in low-cost, diversified index Exchange Traded Funds (ETFs) for diversification. We believe indexing is great for long-term growth.
We believe this hybrid approach to investing will help us, as Tom puts it, navigate the multi-decade investing road trip.
- Develop a routine
Tom wrote “most aspects of your life have a pattern…investing should be no different.” My friend Preet Banerjee likes to say that investing is 90% psychology and 8% math. He says the missing 2% in this equation is to justify the relative unimportance of the math.
Our routine is – we don’t really care what the markets are doing. We save and invest money every month. When we invest we invest in financial products that keep our money management fees very low. It’s a simple routine: save, invest and re-invest.
- Stop overpaying
Are we paying for commissions and fees for advice we are not receiving? No. I am My Own Advisor.
Do we own funds that charge large active money management fees? Heck no. The most expensive fund I own costs me less than 20 basis points. Including our transaction costs to purchase our stocks and ETFs a few times per year, the cost of running our portfolio is less than $400 per year. Compare that to $100,000 invested in bank mutual fund that charges 2% MER (management expense ratio) and that fee jumps to $2,000 per year for every year you own that fund.
Don’t want to DIY invest like I do? No problem. Consider this low-cost robo-advisor here.
- Be prepared for jolts and extremes
Just being honest.
I know the market goes up then down then up again. The challenge is never giving into this cycle below (image courtesy of Behavior Gap):
I haven’t perfected investing but I’m continually maturing my investing brain.
- Avoid the cash drag
Not a problem here Tom. I can appreciate when investors are worried, they hold more cash. However, I’ve learned lots of money in cash, although comforting, is a long-term loser to inflation. We absolutely believe in an emergency fund and we keep that fund around here. However, beyond this amount (since we are in our asset accumulation years) we believe in investing money when we have it. The sooner we can put our money to work, the better; for dividend income and for capital appreciation.
Bad investing behaviour is like any other bad habit – you need to kick the cycle. We’ve come a decent ways over the years but there’s always more work to do. I’m not a perfect investor at all – far from it. But I have learned from my mistakes and we’re becoming wealthier for it. I hope the same for you.
Let me know in a comment what investing behaviour you want to overcome. Thanks for reading.