Richard is a fan of My Own Advisor and a passionate index-investor.
The media makes it sound so easy:
“Don’t sell when the market is down.”
“Stick to your plan.”
But when we keep hearing these messages how is it that investors keep making those mistakes?
When I started out I was confused and nervous because of all the financial advice that came my way seemed hard to follow. These days I rarely get worried and when bad news comes out I just smile and remember that everything is ok.
The biggest thing that has changed with me over the years is how I think about investing. There are some things that most people would see as a mistake but I think it’s a good decision. There are other choices that most people would think are good but I would view them as a potential mistake. Here’s my quick example:
The other day I was reviewing a friend’s portfolio and saw that he had a good mix of index funds and one gold fund. I’ve never invested in gold but it has done well for some people. After we talked about gold in his portfolio he sold it the next day and moved the cash into the other index funds. This wasn’t because gold was a bad investment per se, it has done well for some investors like I mentioned. For my friend though, he no longer has to worry about what gold will or won’t do. This is a good investing decision. It’s not about finding investments that will do great next year, in the next 5 years, or in the next 10 years. It’s about finding investments that should perform well over multiple years – that’s investing. Picking investments that may perform well is very difficult to do. Owning investments that should do well over time is rather simple. So many things you read or watch will trap you into picking “the right investments”:
“Gold prices will double!”
“This company is about to take over its industry!”
“The Chinese economy is projected to grow 10% per year!”
I call this the “lottery mentality”. Too many investors are dreaming of winning the big prize and don’t stop to think about the easy alternative.
Make Your Portfolio Safer and Choose Better Investments
I suppose the good news is, the chances of your hand-picked investment working out can happen but the bad news is it’s not very likely. When we choose individual investments based on what will happen if everything goes right, every piece of bad news is painful. If our plans are built on only good results we are settings ourselves up for failure.
To handle bad news, most of my assets are in broad stock market indexes so it’s a different story for me than the individual gold investor or stock picker. My collection of companies has potential upside (history has proven this) but they can also drop quickly as a group as well (history has also proven this). I believe in indexing because I’ve learned most market drops are not permanent. And if they do last for a long time I’ll probably end up making even more money over the long run thanks to reinvested dividends from company profits or buying more indexed units at cheaper prices.
I’ll admit it’s not fun to think about all the things that could go wrong with your investments. But when you do all the worrying up-front, you can then move on with your life; this way saves you from worrying about your portfolio. If you spend all your time daydreaming about how you’re going to spend the millions gained from that “hot stock tip”, I can almost guarantee you’ll become another nervous investor who will drive the market into wild swings – and likely drive yourself wild in the process.
You already know this by now but it’s always worth repeating – the biggest investing mistake isn’t picking a losing investment, it’s picking an investment where we wouldn’t know what to do if the losses begin. So before you invest in the latest big thing, ask yourself whether you would still be happy with your investment decision if it drops significantly in value and if anything it drops more over time. If you’re unsure what you’d do and how you’d react, I suspect you’ve picked the wrong investment.
Whether you want low-maintenance index funds or you prefer dividend investing or day trading, you’ll only get those wins when you’re prepared for the loses. The best investors forget about the hype and “sure wins” and take a more balanced view – that’s why they brush off bad news and do so well.
Richard is a fan of My Own Advisor and a passionate index-investor who teaches investors how to build an indexed portfolio they can believe in at Master Your Portfolio. Thanks again Richard!
Richard, we think alike, even though our strategies are a bit different. “It’s about finding investments that should perform well over multiple years – that’s investing.” Bingo. Thanks for sharing your insights on my site and I look forward to your next contribution here – Mark.
I’m pretty solid with my portfolio and it wouldn’t break me if all of a sudden it lost a ton of value. We have savings and we are young so we can always make it back, though of course I would prefer that it not do anything drastic. We are pretty diversified, too.
Since I don’t plan to retire anytime soon, I welcome falling stock prices. I hope things tank actually so I can buy more.
I have been thinking about index funds a lot lately. If someone asks me about investing I will usually recommend index or certain income funds depending on their needs. Index funds are certainly a less stressful vehicle compared to picking your own stocks. All depends on how involved one would liek to be. With a good index fund you can almost set it and forget it and rebalance once a year unlike stocks.
I hold a number of stocks, but I will be indexing more in 2015. Just makes too much sense not to do so, for the reasons you know AG, you can pretty much set it and forget it.
Thank you for sharing Richard’s index investing strategy. We all learned from our previous mistakes on investment, and try very hard to find the right strategies that work well and suit our own investment goals.
You’re welcome, he knows his stuff and I think indexing for the most part is the way to go for most investors. I will be indexing more myself in 2015+.