This is the second in a series of posts about my investing philosophy – Focused. It can be difficult to keep an eye to the big picture without getting distracted by all the different ways to invest. Focus is about maintaining perspective, understanding why we invest and measuring the success of those investments.
Think Left of the Decimal
Spend more time/energy on the things that have a true impact and less time/energy on low-impact items. It’s worthwhile to examine whether your portfolio should have a 60% or 70% allocation to Equities, but if you’re torn over adding a 0.5% exposure to a single country ETF, you’re overthinking things. This goes for all things investing. Get the big things right. Avoid errors caused by forgetting what you are really trying to do. You don’t have to be a great investor, just don’t be a bad one.
Understand when you’ve won the game. When you’ve hit your financial goals, you begin to experience some marginal utility. That is, the additional money makes less and less of a difference to the investor and their quality of life past a certain point. While the reward this extra money represents shrinks, the risk remains the same. It makes sense to take time to re-value what extra return beyond your goal really means and how much downside you’re willing to tolerate in the pursuit of surplus when you approach your goal. This applies to retirement, but to shorter-term goals, too. Does it make sense to risk a year’s worth of college tuition to possibly gain a semester’s worth of books? Most people are not willing to take that risk which is why they shift to bonds and cash as they near the date they’ll start spending.
Focus on the process of investing, not a short-term outcome. Goals will be met if the process is kept alive and thriving. This extends beyond the initial setup of asset allocation, asset location, and investment selection. Ongoing due diligence, portfolio rebalancing, and tax loss harvesting are essential.
The above chart from JP Morgan shows the range of returns is large for time periods less than a year and smaller for longer time horizons. It doesn’t make sense to predict or rely on the short term since returns can vary so wildly. This is also good to keep in mind during market corrections. Negative returns are short-lived relative to most investors’ time horizons.
Simple Beats Complex
That’s it. Simple beats complex. People tend to think there is a trick to beating the market. There’s no trick. The truth is that the more complex an investment strategy is, the more likely it is to underperform expectations or even blow up.
How Did You Do?
You can’t improve your performance if you don’t measure the result. Brokers don’t volunteer actual return numbers. Instead, they hand over statements and leave it to the client to decipher. A fiduciary, on the other hand, should be willing to aggregate all of your investment accounts into one performance number and show it relative to an appropriate benchmark across various time periods. This way you can see how the portfolio as a whole has done as well as whether trading activity has added value or been window dressing.