Developing conviction to stick with a long-term investment plan

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Robert T
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Developing conviction to stick with a long-term investment plan

Post by Robert T » Sun Jun 12, 2016 6:55 am

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Worth repeating from Swensen's "Unconventional Success" book:

On the need for conviction:
  • “Real conviction proves necessary to stick with an out-of-favor strategy in the face of apparently poor results and obvious public skepticism. Investors ultimately reap reward only if they maintain positions in the face of market woes.”

    “Lightly held positions invite casual reversal, exposing vacillating investors to the costly consequences of market whipsaw.”

    “Unless investors adopt firmly held convictions regarding the efficacy of target portfolios, nearly certain disappointment results.”
On how to get it:
  • “Devoting significant time and energy to the science and art of designing long-term portfolio targets increases the likelihood that investors will develop the conviction necessary to maintain a steady long-term course amid the turbulent crosscurrents endemic to security markets.”

    “Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications.”
On the last point - it may be a useful exercise for investors to write down the rational for building their portfolio to certain specifications (perhaps even including why it wasn't set up to other specifications) - to re-read in times of market uncertainty to help stay the course.

What was your rationale?

Robert
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Watty
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Re: Developing conviction to stick with a long-term investment plan

Post by Watty » Sun Jun 12, 2016 7:28 am

Robert T wrote:What was your rationale?
A dose of humility.

It took a while but I eventually realized that that I am not able to pick superior stocks, superior mutual funds, "tilt" my portfolio, time the market, or find an advisor that can do any of these. Fortunately I learned these lessons early on when the amounts involved were relatively small.

Compared to some people that post here my portfolio is relatively modest but I have "enough" and that really helps since there is little pressure to outperform but a lot of good reasons to invest a bit defensively.

I recently retired and since I don't have any special tax issues I have move most of my retirement funds into target date mutual funds.

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SimpleGift
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Re: Developing conviction to stick with a long-term investment plan

Post by SimpleGift » Sun Jun 12, 2016 7:45 am

Robert T wrote:On the last point - it may be a useful exercise for investors to write down the rational for building their portfolio to certain specifications (perhaps even including why it wasn't set up to other specifications) - to re-read in times of market uncertainty to help stay the course.
This is an excellent suggestion, one that’s personally proven quite helpful over the years.

Having a written record of one’s study and research findings during the portfolio design phase, which can be easily referenced and re-read during subsequent periods of market stress, can greatly facilitate “staying the course.” In my case, it's a little binder of influential studies and articles that were most essential to my portfolio design, with self-written summaries and bullet points (and of course a few charts!). Highly recommended.

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matjen
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Re: Developing conviction to stick with a long-term investment plan

Post by matjen » Sun Jun 12, 2016 8:20 am

Simplegift wrote:
Robert T wrote:On the last point - it may be a useful exercise for investors to write down the rational for building their portfolio to certain specifications (perhaps even including why it wasn't set up to other specifications) - to re-read in times of market uncertainty to help stay the course.
This is an excellent suggestion, one that’s personally proven quite helpful over the years.

Having a written record of one’s study and research findings during the portfolio design phase, which can be easily referenced and re-read during subsequent periods of market stress, can greatly facilitate “staying the course.” In my case, it's a little binder of influential studies and articles that were most essential to my portfolio design, with self-written summaries and bullet points (and of course a few charts!). Highly recommended.
I have the same as well as snippets of posts from this forum. But, more often than not, I will go back to the single best resource available IMO. Robert T.'s Collective Thoughts!!

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Re: Developing conviction to stick with a long-term investment plan

Post by selftalk » Sun Jun 12, 2016 9:15 am

This has been a very good thread and with references back to David Swensen and his thinking.

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Re: Developing conviction to stick with a long-term investment plan

Post by livesoft » Sun Jun 12, 2016 10:00 am

Don't studies show that if you "publish" your plan that you have a better chance of going through with it? That is, if you tell others that are going to do something, then you really do it because you are then held accountable in your mind by the others you have told.

So in that regard, if you tell others what your exact plan is on Bogleheads.org, then you have published it and will feel accountable. We can even keep you accountable if you want.

It works for me.

I tell others my plan (buy on RBDs) and that certainly helps me buy on RBDs.
I tell others my plan to tax-loss harvest and that certainly helps me to tax-loss harvest.
I tell others my plan to rebalance and that certainly helps me to rebalance.
And so on ....
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Re: Developing conviction to stick with a long-term investment plan

Post by pkcrafter » Sun Jun 12, 2016 10:38 am

Thanks, Robert.
“Devoting significant time and energy to the science and art of designing long-term portfolio targets increases the likelihood that investors will develop the conviction necessary to maintain a steady long-term course amid the turbulent crosscurrents endemic to security markets.”

“Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications.”
This is very important, and as a result, simply writing an Investment Policy Statement is not sufficient to stay with the plan if the plan has not been properly developed.

Paul
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Re: Developing conviction to stick with a long-term investment plan

Post by Taylor Larimore » Sun Jun 12, 2016 11:12 am

What was your rationale?
Robert:

When I am undecided I listen to experts:
Frank Armstrong, advisor and author of The Informed Investor: "Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy."

Barber Odean Study: "Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. Our central message is that trading is hazardous to your health."

William Bernstein, author of Four Pillars of Investing: If you become upset when one of your asset classes does poorly, even when the rest of your portfolio is doing well, then you should not be managing your own money."

Jack Bogle: "Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you." (underline mine)

Bogleheads Guide to Investing: "Wall Street can't stand buy-and-hold strategies because brokers need trading activity to make money."

Jack Brennan, former Vanguard CEO: "If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor."

Warren Buffett: "Inactivity strikes us as intelligent behavior."

"Andrew Clarke, author of Wealth of Experience: "Setting a goal, developing an appropriate asset allocation, and selecting a handful of funds are not hugely complex tasks. The hard part comes next: Battling your emotions so that you can stick with your plan through thick and thin."

Jonathan Clements, author and Wall Street Journal columnist: "Take my word on it. Buy-and-hold is still your best long-run strategy."

Phil DeMuth, adviser and co-author of seven investment books: "The investor says to his adviser: 'Every year you tell me to do nothing. What do I need you for?' The adviser replied: 'Every year you need me to keep your from doing anything.' "

Paul Farrell, author of Lazy Persons Guide to Investing: "In a study of 66,400 Merrill Lynch investors, professors Odean and Barber discovered that buy-and-hold investors beat the more active investors by a fairly sizable margin: 18.5% to 11.4% over a six-year period."

Rick Ferri, advisor and financial author: "Write down your strategy -- and stay-the-course."

Steve Forbes: "Everyone is a long-term investor until the market goes down."

Alan Greenspan, former Chairman of the Federal Reserve: "The best strategy for equity investor has always been buy and hold, and forget it."

Morgan Housel, financial columnist: "Do nothing" are the two most powerful -- and underused -- words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers."

Michael LeBoeuf, author of The Millionaire in You: "Simple buy-and-hold index investing is one of the best, most efficient ways to grow your money to the ultimate goal of financial freedom."

Jessie Livermore, famous stock trader: "The big money is not in the buying or the selling, but in the sitting."

Burton Malkiel, author of Random Walk Down Wall Street: "Buying-and-holding a broad-based market index fund is still the only game in town."

Morningstar video: Bad Timing Costs Investors 2.5% Per Year

Bill Schultheis, author of The Coffeehouse Investor: "42% of millionaires of this country make less than one transaction per year in their investments."

Fred Schwed Jr. author of "Where are the Customers' Yachts? "It turns out that I should have just bought them (securities) and thereafter I should have just sat on them like a fat, stupid peasant."

Chandan Sengupta, author of The Only Proven Road to Investment Success: "If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor."

Dan Solin, financial author and adviser: "Once you understand that monitoring the markets is harmful to your long-term returns, a whole new world of opportunities will await you."

Larry Swedroe, advisor and financial author: "Trading the stock market is a sucker's bet."

Eric Tyson, author of Mutual Funds for Dummies: "Don't trade in and out of funds. Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work."

Jason Zweig, financial author and Wall Street Journal columnist: "The ultimate benefits of owning stocks accrue only to those who can buy and hold."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Developing conviction to stick with a long-term investment plan

Post by SimpleGift » Sun Jun 12, 2016 1:03 pm

David Swensen wrote:"Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications."
Mr. Swensen’s advice likely applies just as much to investors with simple 2- and 3-fund portfolios as it does to those with more complex tilted and sliced-and-diced portfolios. For example, during the so-called Lost Decade (January 2000-December 2009), I expect those investors with portfolios dominated by U.S. large cap stocks had a very difficult time “staying the course,” when REITs, small value and emerging market stocks were all outperforming by such a large margin (chart below).
  • Image
    Note: This chart shows cumulative total returns for the decade.
    Source: Better Money
In short, a simple 2- or 3-fund portfolio requires just as much conviction and discipline as a more complex portfolio, I believe.
Last edited by SimpleGift on Sun Jun 12, 2016 2:03 pm, edited 1 time in total.

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Re: Developing conviction to stick with a long-term investment plan

Post by cinghiale » Sun Jun 12, 2016 1:52 pm

Maybe we should combine what Watty and livesoft suggested-- to wit: a public declaration, a "publishing" of our failed attempts at investing in the next great stock, sector, country, fund manager, commodity, or timing system.

Think of it as something like Overreachers Anonymous. "Hi, my name's cinghiale, and I've blown some good money on some asinine investments." (Picture people in a rented church hall, sitting in folding chairs and sipping coffee out of styrofoam cups saying, "Hi, cinghiale...")

Oh, Lord, I have some stinkers I could mention. But, even worse, there were on or two doubles and one home run among all the strikeouts and times hitting into a double play. That, like a slot machine hit in Vegas, kept me thinking I could refine my abilities and thus, my results. Wrong, wrong, wrong. Game, set, match.

Is it kosher to mention particular funds, manager, stocks, or sectors in the forum? If yes, I'll name mine. They're really cringe-worthy in retrospect. But isn't that the kind of thing that will keep us publically (per livesoft) humble (per Watty)?
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Re: Developing conviction to stick with a long-term investment plan

Post by heyyou » Sun Jun 12, 2016 2:59 pm

Work on your perceptions. When gasoline prices are down, are you glad to pay less, or lament the reduced value your Exxon shares in your index holdings? When the market crashes, shares are on sale AND your portfolio value is down, choose the former and focus on it. As is expected, what is best, is not easy to do--Bogle's "Simple, but not easy."

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Re: Developing conviction to stick with a long-term investment plan

Post by Robert T » Sun Jun 12, 2016 6:13 pm

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I agree with Simplegift that its as important to have a clear rationale for a one or two fund portfolio as its for any other portfolio. Simplification doesn’t automatically make us immune to emotions and potential urges to change allocations stemming from market volatility (re: 2008). We need to have conviction with our own personal portfolios – whatever they may be. I also agree with livesoft that making your plan ‘public’ can act as a sort of ‘commitment device’. And perhaps that is a part of the reason for my earlier post linked by matjen. And detailing past mistakes (and their costs) can be a useful reminder to periodically re-read, so a not to repeat.

Personally, I have a 1-2 page summary of the rationale underlying the decisions to structure my portfolio 'to certain specifications' - including the rational underlying decisions to exclude certain things from the portfolio. Personally this has been tremendously helpful to develop conviction to stay the course with a long-term investment plan - so far, so good.

There will inevitably be: future market declines, asset classes/factors that will periodically underperform others, voices from the financial media (and peers) on what's hot and what's not, etc. As per Swensen, investors who have a "fundamental understanding of the rationale for building the portfolio to certain specifications" will find it easier to navigate these currents than those that don't. Writing it down, and re-reading in times of market induced doubt, can help investors stick with their long-term investment plan.

Robert
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Re: Developing conviction to stick with a long-term investment plan

Post by lemonPepper » Tue Aug 23, 2016 12:37 pm

Nice suggestion on writing down your rationale. Writing makes it more clear for me. I'm in the phase where I'm still building my portfolio strategy.

Contrary to what many people say, successful investing is time consuming. Now most of the time I need to invest is not in trading or reading individual company reports but in learning the history and investor behavior. I don't know why many claim that investing shoudl only take a small number of hours every year. While a simple portfolio makes a lot of sense to me, I think most people who don't spend time reading books on investing would probably not be able to stick to that plan.

I personally think one should read a number of classics, write down the lessons learned in their investing binder and have a list of common mistakes people make. Before making any change to the investments, one should review to make sure you are not making those mistakes. One of the things I'm learning is asking BH community before making any big changes.

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Re: Developing conviction to stick with a long-term investment plan

Post by goingup » Tue Aug 23, 2016 1:03 pm

lemonPepper wrote:Contrary to what many people say, successful investing is time consuming. Now most of the time I need to invest is not in trading or reading individual company reports but in learning the history and investor behavior. I don't know why many claim that investing shoudl only take a small number of hours every year. While a simple portfolio makes a lot of sense to me, I think most people who don't spend time reading books on investing would probably not be able to stick to that plan.
When you're just beginning it's good practice to read several books. But after reading a handful of books--"Bogleheads Guide", books by Jack Bogle, Rick Ferri, and Dr. Bernstein, you're pretty well set. There is a big drop-off in the marginal utility after those have been read.

Many of us here are just hobbyists, and do very little actual work on our portfolios. Personally, most all of my purchases are automated. I rarely rebalance, and only sell to tax-loss harvest. I suppose you can spend a great deal of time tinkering on your portfolio, but tinkering usually doesn't improve results.

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Re: Developing conviction to stick with a long-term investment plan

Post by lemonPepper » Tue Aug 23, 2016 1:47 pm

goingup wrote: When you're just beginning it's good practice to read several books. But after reading a handful of books--"Bogleheads Guide", books by Jack Bogle, Rick Ferri, and Dr. Bernstein, you're pretty well set. There is a big drop-off in the marginal utility after those have been read.

Many of us here are just hobbyists, and do very little actual work on our portfolios. Personally, most all of my purchases are automated. I rarely rebalance, and only sell to tax-loss harvest. I suppose you can spend a great deal of time tinkering on your portfolio, but tinkering usually doesn't improve results.
yeah. I'm in the early phase and trying to come up with an IPS and rationale. One surprisingly good book that helped me think about asset allocation is "Death of buy and Hold". It helped me understand the reasons behind various asset classes and why buy, hold & rebalance has worked in the past and will continue to work. The turned me on to various books like bogleheads, Jeremy Siegel, Shiller, Zweig and Bernstein. I've always been interested in how the world of money works so I'm going beyond the investing books into macroeconomic theory and history as well.

I personally feel only this knowledge of history and regular reading on BH can help me stay the course.

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