Thursday, October 9, 2014

“Invest However You’re Most Comfortable”

It sounds wonderfully inclusive to say that everyone can succeed at investing by approaching it in whatever way they’re most comfortable. In reality, this just isn’t true.

One elderly couple I know has been living off GIC interest for many years. Even worse, they’ve just been accepting the interest rates offered by big banks instead of seeking out the best rates. They now have very little left and are forced to live extremely modestly. Given the large nest egg they started with decades ago, they could still be living a middle class lifestyle. But they stuck with what made them comfortable.

I’ve known two people well who tried to make money with stock options. Both lost all the money they devoted to the effort. They didn’t like the idea of making money slowly and went for some big scores. So much for seeking success investing in their own way.

Many of my colleagues over the years have invested their money trading individual stocks. This was particularly true during the tech boom in the late 1990s. It can be tricky to learn people’s true returns because they usually don’t know themselves how they’ve done. They tend to boast about their successes, but you can get them to moan about their losses if you ask right. I’m willing to guess that few of these people managed to do as well as market returns.

I was comfortable with stock-picking for many years. However, if we eliminate the spectacular returns I got on one stock in 1999, my stock-picking record was underwhelming. If I had continued stock-picking with this level of underperformance instead of switching to indexing, by today my portfolio would be smaller by about the value of my house.

It makes so much sense to seek out friends and activities that make us happy and comfortable, but this doesn’t apply to investing. It pays to reason your way through deciding how to invest your life savings.

13 comments:

  1. So you are saying using my beer bottles as a savings plan isn't a good idea?

    ReplyDelete
    Replies
    1. @Alan: Well, as long as you're comfortable ...

      Delete
  2. Replies
    1. @Robb: I wish I recorded the instances over the years where I heard someone say a variant of "it works for me" followed some number of years later by "why was I so stupid?" :)

      Delete
  3. I'm amazed by how many people can't evaluate risk. I've had people who after just having taken out their new iphone while drinking a starbucks coffee and buying a new car last month, tell me that they don't believe in buying stocks as companies go bankrupt all the time and they need something safer, like GIC's. I tell them that a GIC earning 1.4% while inflation is running at 2% is not safe, and they look at me like I'm crazy. Then they go buy an app. ARRGH!

    ReplyDelete
    Replies
    1. @Anonymous: I agree that many people perceive risk strangely. Even those who have some handle on risk often cannot understand the necessity of being compensated for taking risk.

      Delete
    2. I index all my retirement money and stock pick with money I can afford to lose. It works for me:-)

      Delete
    3. @Peter: "can afford" or "intend"? :-)

      Delete
  4. Replies
    1. @Peter: Lotto Max is great; I save money every time I don't play :-)

      Delete
  5. Almost akin to "invest what you know"?

    I think the best investment plan is ultimately one you can a) stick with long-term and b) one that meets your financial objectives. If c) that plan gets you the "best returns" then that's a bonus. It sounds easy but in practice it's rather difficult.

    ReplyDelete
    Replies
    1. @Mark: Ironically, when people deviate from a plan that gets the best available returns, their motivation is usually to try for even higher returns, but they usually end up with lower returns. You're right that you need a plan you can stick to. Unfortunately, too many people are able to stick to a plan that involves jumping from one investment idea to another.

      Delete
    2. I just recently purchased 2 small biotech companies, I'll let you know what my capital loss/gain works out to. I set aside some gambling money every month.

      Delete