Wednesday, September 9, 2009

Ostrich Investing

Today we begin with a little story about ostrich investing. Our heroine, Donna, decided that she had a good life and wanted to give something back. Donna decided to sell her house and spend a year in Africa helping to build schools.

Back on October 2, 2008, she took the $100,000 equity from selling her house, deposited it into her brokerage account and put all of it into the S&P TSX index (ticker: XIU). The sale went through at $16.80 per unit, and she hurried off to board a plane for what promised to be a rewarding adventure.

After a lot of hard work and making some lifelong friends, but little contact with Canada, Donna arrived back in Canada last night to stay with her parents. After a meal and catching up for a few hours, Donna decided to take a look at her online brokerage account.

Imagine the devastation! Donna is completely oblivious to the turmoil in financial markets over the past year. There was real estate bust, the credit crisis, and the stock market crash. At one point in March, her portfolio was down nearly $32,000.

However, coincidentally, yesterday’s closing price for XIU was $16.80, exactly what she paid for it nearly a year ago. Her stock is still worth $100,000, and her account has $2020 in cash from the three dividend payments. Unaware of the roller-coaster ride her portfolio experienced, Donna is mildly disappointed that she didn’t make more money.

Other investors who held on through this period, but watched their portfolios daily feel like they’ve been through the ringer. Their results match Donna’s, but human nature is such that they feel far worse than she does.

Investors could take a lesson from Donna. If they are comfortable with their mix of investments, then there is no need to monitor them on a daily basis, particularly if the assets are in broad-based index funds.

I’m not advocating ignoring investments for an entire year. After all, you should at least check that your account statements are accurate. But compulsively checking prices multiple times per day is no way to live.

7 comments:

  1. Another great parable.

    I wonder what would have happened had she put her money in ostrich futures.

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  2. I invest biweekly in index mutual funds (80% equity, 20% bonds) and hope that 35 years from now, when I retire, they will have grown and not just be breaking even.

    There is no way to tell in advance what will work and what wont. After reading the little book of common sense investing by john bogle, I was convinced that this was the right way to go.

    Now I've read stop working and the lazy investor by derek foster and have decided to try DRIP investing in addition to index investing.

    I hope all my techniques work and that I can retire rich.

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  3. If you're really in it for the long term, you really shouldn't feel the urge to look at your investments on a daily basis. Unless you like that kind of excitement.

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  4. If Donna had reinvested her dividend payments or added money to her account she would have been even farther ahead. Not bad considering we've just come through one of the most bruising bear markets ever.

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  5. Gene: Thanks. I was going to do another market timer breakeven date update, but decided to have some fun with it.

    Saint Lucian Dutch Canadian: It sounds like you have a good plan as long as you can avoid making any panicked moves the next time the markets go a little wild.

    Brian: I agree. I suspect that many people watch their investments daily out of fear and not really understanding how investing works.

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  6. CC: Good point. That makes me wonder how an investor who dollar-cost averaged through the downturn would have performed. Maybe I'll turn that into tomorrow's post.

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  7. Great post. Puts an interesting perspective on the crash.

    and revovery.

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