“The four most expensive words in the English language are ‘This time it’s different.” -John Templeton
What if we knew that the secret to investing is that there is no secret? What if we knew that the constant search for a secret was the problem? If this is true, the financial media would be in big trouble. Their gig would be up. Their constant need to engage us with the next crisis or get rich idea would fall on deaf ears.
Investing can be a lot like a casino. At a casino, there are two key stakeholders: patrons and owners. As a visitor, we can sometimes win and sometimes lose. If we play enough, we fall right smack dab into the odds the house has calculated. They win. It has to be this way. We have a similar choice in investing. How can we be the owner and not the patron? How can we invest like the owner (the principled way) and not the patron (the unprincipled way)? We can stop being the patron.
THE PATRON invests with no financial plan in place. Economic forecasting becomes valued. What is the next great thing? The belief is that somehow investing can solve all financial issues. This is the opposite of accountability and empowerment. It leads to blame and regret. “Why did they tell me to do that? I should’ve done this instead.”
THE PATRON values the short term over long term. The constant search for return without risk creates disaster. We fall for the word “guarantee.” We get scammed by Ponzi criminals (Madoff, etc.). We buy expensive annuities and whole life insurance promising a one-size fits all solution to our financial woes. Short-term is easy, but disastrous. Long-term is hard, but rewarding.
THE PATRON shuns diversification. We put all our eggs into one basket and believe it’s wise. We convince ourselves that: gold is the place to be, real estate always goes up, hedge funds are for the wealthy, oil is the way to be rich. There will always be trends claiming to be the best place for our hard earned money. Don’t give one idea the ability to kill our financial future.
THE PATRON fails to rebalance and lacks consistency. Rebalancing is the cure for the constant temptation to time the markets, follow the financial news media, and forecast the economy. With rebalancing, we win regardless of the short term outcomes. If stocks drop in the short term, we buy more. Rebalancing does this. If stocks rise considerably, we sell a portion of our gains. Rebalancing does this. Without rebalancing, the emotions of “do it when it feels right” takes over and that will be wrong. Money will be invested when it feels right, not consistently to the plan on a set date each month with an established dollar amount. This will kill your long-term returns. Simply type “dollar cost averaging definition” into an internet search. It’s the hidden gem of wealth building.
THE PATRON acts on emotion. Feeling normal emotions is expected: pessimism when times are tough, euphoria when markets are high. That is fine. Acting on the emotions is not. Changing our plans based on market movements is harmful. Let’s not be our own worst enemy. Recognize and acknowledge the emotion. Continue with the plan in spite of the emotion. No one ever panicked their way to wealth.
THE PATRON inappropriately measures investment performance. Investment performance is a giant distraction. The more short-term, the more it hinders the plan. Stop following the DOW. Stop following the S&P 500. This is the financial media at work. Don’t allow them to infiltrate your plan. These are not good benchmarks. They do not make you wealthy, successful, or lead to you accomplishing your goals. They can and often do prevent these things. High returns is not a goal. Stop the madness!
THE PATRON pays too much in investment costs and taxes. Lack of investment principles keeps us searching. Searching for the next best thing is expensive. The more changes made, the higher the cost and the higher the taxes paid. A disciplined strategy is low cost across the board. More action equals more cost. Take only the actions that bring back value: planning and rebalancing to name a couple.
Don’t be the patron, be the casino owner. Make your money over time with a process. Maintain discipline (doing the right things) and patience (avoiding the wrong things). Have a planning process in place. Investments are there to support the plan. Focus on what can be controlled. Don’t fall into the trap of these investing myths. Keep an eye on the prize, those important life goals. Wealth accumulates with consistent action over time. This type of investment process, baked into a larger financial planning process, is required.
“In investing, what is comfortable is rarely profitable.” -Robert Arnott
