Looking for a fool-proof system for investing success? I’m not sure there really is one but you can’t really go wrong following this advice: Smart investors keep it simple. Keep It Simple, Stupid … KISS. This is the view of many Bogleheads and behavioral finance experts like Meir Statman, author of What Investors Really Want.
Too often we try to out-think and over-analyze things. We are prone to be tinkerers in most things in our lives. (And women know that guys just love to fix things). In reality, we can control only so many things – and there’s only so much time in a day. So take the time to control those things you can and then use your energy to focus on other stuff – your job, family, friends and health.
That may not be exactly what Professor Statman is saying (it is what I’m saying) but the sentiment is the same. Too often we are ruled by our emotions. And dealing with money is not much different. We swing from “irrational exuberance” on the one hand to “doomsday” scenarios on the other. So, like generals fighting the last war, we’re too cautious and risk-averse after having been burned so we may wait too long to jump back into the markets. On the other hand, we can easily be caught up in the mania of the moment and pour our money into the “hot” stocks or mutual funds that regularly grace issues of magazines (including Kiplinger’s where Statman’s interview may be found).
Suffice it to say that if you can keep your emotions in check in life you’ll be successful at your work, play, marriage, family and, of course, investing.
So what’s a smart investor to do? Use these smart investing rules:
- Understand your risk tolerance and question it regularly
- Minimize your emotional reactions by employing proven techniques such as Dollar Cost Averaging
- Diversify, diversify and diversify – the equivalent of the mantra in real estate success of ‘location, location, location’
- Save more than you spend
- Pay yourself first (another way to say ‘save’) and
- Control your expenses – index funds are a good place to start for your core.
Role of a Good Investment Adviser
Like in most things in life, you can do investing on your own. There’s nothing that says you can’t or shouldn’t. You may do better than most actively managed mutual fund managers or the investment advisors who choose the funds for you.
But the role of a good investment advisor is not to pick a bunch of winning managers and funds. That’s great if they can do that. Consistency may be an issue though (as most active managers don’t beat their benchmarks so by extension most active funds chosen may not always beat their benchmarks either).
I think – and I’m biased here since I’m working in this space – that the value of a good investment adviser is the ability to bring order to the chaos and emotions that can cripple a well-intentioned investor. Guiding conversations about goals, values and how to deal with a family’s resources is more valuable than any specific investment. Then a good investment advisor can develop a plan and process for determining the appropriate way to diversify and find managers or investments with low costs. Having a process and being able to exercise discipline and fidelity to a chosen course of action is our greatest role. This pays investors huge dividends when they understand that we can help the majority of investors avoid shooting themselves in the foot with bad timing, unneeded trading and the disappointment from chasing fads.
In my MarketFlex Portfolios, I focus on building a diversified core-satellite approach using low-cost index funds. I think that any fan of index investing (Bogleheads included) would appreciate this approach. There are investments in US stocks as well as international and emerging markets. There are positions in international and emerging market bonds. And the core is rounded out by satellite positions in certain asset areas where there may be added value from allocations that may produce more income or more hedges to market volatility.
The Sand Box for Investors
Now what about those who want to drive fast and take chances? Heck, there is a saying: No Gain, No Pain.
I encourage investors to set aside money where they can trade and experiment with their own ideas. They can use this sand box to burn off their energy in much the same way that my toddlers do before we begin our dinner and night time routines. Maybe I’m an enabler but I also recognize human nature. There are certain investors who like to be in control. Here they can do it but without betting the farm or risking their entire nest egg.
No matter how you approach investing, try not to over think it and consider the wisdom of a simple approach.
