Perspectives on Investing – First in a series of articles on investing basics

What makes the average person a better than average investor? The answer is doing just a few things right.

Expectations

The first thing you need to realize is you cannot know everything you need to know to consistently outsmart the market. No one does. The key for average investors is doing what we can do as efficiently as possible. In other words, maximize returns by eliminating the slippage produced by mistakes.

Alice-in-Wonderland-rabbitThis quote from Alice in Wonderland is appropriate for the majority of investors:

“The hurrier I go, the behinder I get.”

The remarkable result of not being in a great hurry to build wealth is you will end up with better than average returns in the long term.

 How can being average end up with returns that are better than average, you ask? The answer is most investors repeatedly make mistakes both in behavior and cost efficiency, the two most important aspects of investing. So, while doing a few things right sounds easy, the results show it is not. It is extremely difficult to beat the market in the long term, so when I say you can beat the majority of investors, it means you will get more of what the market produces–your fair share as John Bogle describes it.

Mr. Bogle has also said“Don’t just do something, stand there!”

What he means is follow a few rules, don’t listen to the noise, keep your emotions in check, and stick with your plan. Patience is an attribute that is frequently needed.

Patience: an ability or willingness to suppress restlessness or annoyance when confronted with delay.

Part of expectations is clearly defining the goal

Investing defined: Money committed or property acquired for future income. A trade-off between risk and reward while aiming for incremental gain and preservation of the invested amount (principal). Investing means investing in businesses, both in the U.S. and internationally. It is, by definition, a long term commitment to share in the successes of companies in businesses for profit.

Note the definition of investing as compared to speculation and gambling.

Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good

Gambling is betting (wagering) that must result either in a gain or a loss. It is neither risk taking in the sense of speculation ( of substantial short-term risk) nor investing (acquiring property or assumption for securing long-term capital gains).

Commitment: Investing is a plow horse, not a race horse. It involves continuous saving and long term cultivation.

The Bogleheads Philosophy

icon Bogleheads_64x64The Bogleheads’ philosophy is designed to help investors minimize both behavioral errors and costs. Look at the list and try to identify what each item addresses.

 

  1. Develop a workable plan
  2.  Invest early and often
  3. Never bear too much or too little risk
  4. Never try to time the market
  5. Use index funds when possible
  6. Keep costs low
  7. Diversify
  8. Minimize taxes
  9. Keep it simple
  10. Stay the course

Next in the series: Behavioral Pitfalls

Posted in Behavorial Factors, Investing
September 2014
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