BH Emotional Investor - I'm a mess and need help!
sruliz wrote: ↑
Sun Sep 23, 2018 12:22 pm
...I get impatient with my investments and after setting a financial plan tend to mess things up 6-12 months in. ... I sell too fast and buy instinctively and I know that if I don't change my pattern soon I will end up with zero to show for all my investment efforts. I simply don't trust myself anymore to handle my finances.
...[relative managing some money and} I see an active churn on the account and the fees come to about 1% a year.
... tried ... robo-investing experience ... I don't like this experience since it totally removes me from any decision making. I want to feel more involved.
... Invested 125k in a nursing home with a friend last year - no return yet
... Invested 15k in a food truck with a friend last year- 10% return so far
...Because of my propensity to not be able to sit still with my investments I have tinkered with ... tortured by my inability to pick one system and stick with it.
... The automatic systems ... appealed to me because it removes any form of emotion out of investing and gives you clear guidelines when to buy or sell
... I want to build significant wealth for my family ... yet still feel actively involved in my investments...
... I can't see myself investing in a 3 mutual fund portfolio either. I need help and I know its confusing but there must be a solution out there for a guy like me. It's hard for me to consolidate all my accounts in one place and I am sure this is adding to my angst.
Might want to see how many behavioral investing errors you can identify. See "The Big List of Behavioral Biases": http://www.psyfitec.com/p/the-big-list- ... iases.html
Since above linked list is a little cryptic, you will have an easier time if you read some of the recommended books on behavioral finance/investing. They go into more detail so are easier to digest.
After reading the first book, I was surprised to learn I’d been making so many behavioral investing errors. What to do?
Once we identify our personal behavioral errors, we can arrange our lives to try to avoid them in future.
Example. I know I must eat something before I go grocery shopping, to avoid the error of buying snacks. (Mmmmm donuts.)
The same is true for our investing lives. We can arrange our investments to avoid errors.
The economy and stock market.
(This is from my memory of reading some of the recommended books and forum discussions: basic investing how-to, history of academic research into investing success, retirement planning,.... Since my memory is faulty, it’s your due diligence responsibility to read the books for yourself.)
The economy (businesses) and the stock market are two different animals. How so?
Businesses (the economy) depend upon stability* to make a profit. If businesses struggle to right-size but can make a profit, then the stock market will be encouraged and rise. In this the stock market is forward-looking and generally expects better times.
* This means it does not matter which political party is in office. Why? Because businesses will adapt to whatever brand of market stability is imposes.
Question. Where do businesses, public and private, get money?
Answer. From people. As both a source of capital and revenue.
As long as people need goods and services, and businesses providing those goods and services get financing (capital by issuance of stocks/bonds) from the public sector, then investors in those businesses should earn 2-2.5%/yr in stock dividends from business operations.
As long as the population continues to grow (~5%/yr assumed), then businesses (the economy) should grow ~5%/yr to fill the growing demand for additional goods and services.
This means stock prices (stock market) should grow ~7%/yr (= 2% from current operations + 5% from annual business growth). (I recall some forum topics have cautioned that the market may only grow 6%/yr going forward.)
Every year, a varying list of <20%** of businesses return (stock price appreciation) more than the market return after accounting for the transaction costs (research, brokerage, taxes,...) to buy them*. This means a varying list of >80% of businesses return less than the market return. So just from the averages, if you pick individual stocks (or your relative/friend picks/churns them for you), you will own more losers against the market return, than winners. Is this really the type of hands-on, active-involvement you want/need in your life? If not, then don’t seek it by trying to pick individual stocks.
* That’s the good news. The bad news is that it’s very difficult to identify them before the stock price rise. And if you buy after a temporary stock price rise, then you’ve set yourself up to “buy high, sell low” when the business again joins the list of the >80% that lose against the market return.
** The 90% solution.
If you invest in the market return for >10 years, you will outperform the result of >90% of active managers (stock pickers). Why? While <20% of businesses outperform annually against the market return after accounting for transaction costs, for investors who use an active financial advisor, only <10% of businesses outperform after active management subtracts its additional layer of costs (AUM fee, short-term capital gains tax from churning,...).
--If you use an active financial advisor (or try to pick your own stocks), every year he must produce 4-5% more than the market return, to breakeven with the market return after subtracting all costs associated with active management. This is a very high hurdle to overcome and gives the investing edge to passive investors in index funds who simply accept the market return.
--The market return is not average. Why? It’s higher than the return of the average active investor after accounting for all costs. See “The Arithmetic of Active Management” article by William Sharpe, Nobel Laureate in economics: https://web.stanford.edu/~wfsharpe/art/ ... active.htm
--If you invest in the market return, long-term your investments should grow ~6-7%/yr* and you will outperform >90% of active managers. To get the market return, invest in market index funds. (* Depends upon whom you read. And your asset allocation---stock/bond ratio.)
--Cost (loads, fees, taxes,...) is the only investing variable you can control. All else being equal between two investments, choose the lowest cost investment.
--To maximize your retirement investing return, accept the market return and minimize your total cost.
You have fewer safeguards with private equity investments. Why? Less government oversight. (And intervention. Your nursing home and food truck businesses are probably too small to get a government bailout if they get into trouble.)
Plus private equity investors have the added hassle of dealing with family and friends.
On the other hand, when GM went bankrupt, investors in S&P500 index funds (Vanguard’s, Fidelity’s,…) were not hassled when GM was removed from the index, and fund managers were forced to sell GM. Nor where they hassled when GM came out of bankruptcy, was again added to the S&P500 index, and fund managers were forced to buy GM. In both cases, GM represented an investment of <5% of the index/fund---no great worry for index investors. So for public equity investors in S&P500 index funds, GM’s bankruptcy was a non-event because fund managers (and a government bail out) took care of them.
For total market investors, when GM fell off the S&P500 index, it was still on the total US stock market indexes (Wilshire 5000 index,...), so never needed to be sold or re-bought by index fund managers.
Tax reporting. For S&P500 index funds, the forced selling/buying of GM increased costs slightly---higher costs hurt investor return. But total US stock market index funds were not forced to sell/buy GM so costs didn’t increased---lower costs benefit investor return. In both cases, the fund’s annual 1099DIV---a one-line tax-software entry---told investors all they needed for tax reporting. Easy peasy.
In good times, your private equity investments will not be as simple as index investing. In bad times, they will become a major event for you. Do you really want the family/friends drama, or to be required to step in and bailout/manage either/both to prevent, or go through a bankruptcy? Is this really the type of hands-on, active-involvement you want/need in your life? If not, then don’t seek it by investing in private equities, or with family/friends.
Bottom line. Life is much simpler for investors in public-equity broad-market index funds. The anxiety level is so low that forum members brag they know their investments are right (for them) because they can pass the SWAN test. (Sleep well at night.)
Wise retirement investing.
All that is required to invest wisely for retirement is to do a few things right, and avoid serious mistakes.
You know the old joke?
Patient: Doc, it hurts when I do this.
Doc: Don't do that.
In this case, don’t do what you’ve been doing. Why? You’ve (also) proven it doesn’t work.
Instead, set up your investments for simplicity and to avoid behavioral errors.
--Accept the market return, and wait for time and compound interest to work its magic.
--To get the market return, invest in broad market index funds at the lowest cost.
--Every month, add new money to your retirement investments.
--Rebalance your investments as necessary to maintain your chosen asset allocation.
--Don’t sell your investments until you withdraw money in retirement.
If you can't do this for yourself, then pay someone to do it for you.
If you flip a coin. Over the long-term you expect to get 50/50 heads/tails. But you have zero control and can never predict the ordering of heads/tails. In coin flipping, the only smart bet is on the long-term average.
If you invest in the markets. There are ~6,000 companies in the total US stock market index, ~3,000 companies in the total international stock market index, and ~9,000 issues in the total US bond market index. Your odds of picking a winning combination against the market return are much worse than your odds of calling “heads or tails”. In investing, the only smart bet is on the long-term market return.
If you invest in the long-term market return, you are guaranteed to get it. Less your costs, which you will minimize. But you have zero control and can never predict the ordering of returns by year.
A forum member likens investing to the situation where a baseball team sets up against an unknown opponent. The best you can do is to spread your defenses and wait for the ball to come to you.
Disclosure. In my 30s, I tried individual stock investing and quickly lost everything. I was lucky. Why? I didn’t have more money to invest so quickly learned the lesson---stock picking is the losing bet.
On the other hand, you’ve been unlucky. Why? Even though you’ve lost money trying to pick stocks against the market return, you’ve always had enough money to refill your brokerage account. So you never saw a zero balance. Or learned this lesson.
Disclosure. Periodically the forum members go through spells of discussing our plans to simplify our investments and financial lives prior to the onset of old-age cognitive decline. So our heirs, or we can continue to manage them. (And other estate planning issues.)
I went through the drill in 2015 and began consolidating and closing accounts. I’m now down to two fund families, one online bank, and one local B&M credit union. Life is much simpler with fewer accounts. (I could consolidate more, but having a small backup capability is a better plan.)
If you don’t simplify your investments, it will be a mess for your heirs*. If your investments---you’re the only one who knows why you have them---are causing you anxiety, then the anxiety for your heirs will be greater. (* Your wife may only get pennies-on-the-dollar to unravel your private equity investments.)
“Our life is frittered away by detail. Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb-nail.” --Henry David Thoreau
“God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.” --Serenity Prayer
Simplify your investments. Accept the market return as the only guaranteed investment. Your investment anxiety will go away when you stop trying to control that which can’t be controlled. And your heirs will appreciate the simplicity and transparency.
Edit. Final thoughts. Maybe.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.