I’ve been very fortunate. I learned from my parents to be responsible with money. Early on, I learned to think twice about spending decisions and to always save some. Later, I learned to budget, to minimize debt and to invest. I’ve been successful, but I feel like my success is due not only to what I do, but also to the things that I choose NOT to do. I don’t eat out often, I don’t own two cars and I don’t shop as a pastime. I choose forms of exercise that cost little or nothing. These choices have become invisible to me, because they’re long-time spending habits. Now I’m focused on avoiding “bad habits” in my investing behaviour.
When I started investing, I used to check my stocks daily. I lived overseas, so I couldn’t check them hourly because the North American market was only open during my nighttime. Even so, I found that watching too closely was at best a distraction. At worst, I could easily be tempted to trade too frequently, jumping in and out of the market adding up nothing but trading commissions. Now, I generally look at the market, my portfolio and my stocks each week. This gives me a chance to evaluate whether or not a change is warranted, but my goal is to minimize trading, keeping down costs and potential mistakes.
Hot tips and IPOs are both best avoided. In both cases, it’s unlikely that I’ve done adequate research, either due to urgency or unavailable information and track record. Investing, like any decision-making, is emotional, but emotions need to be controlled and logic emphasized. A hot tip is the essence of investing based on emotion. So is the story-telling that contributes to the entertainment of BNN and roadshows. Instead of getting caught up in the excitement, I prefer stocks that are boring, overlooked and under-loved.
Some people try to wing it. They either don’t have a strategy, or the strategy changes with the prevailing sentiment. When tech stocks are hot, they load up. When they get burned, they move to GICs. Once stocks have recovered, they buy in. When the market crashes, they go to bonds. Again and again, they buy high and sell low. These are the people who should not invest in stocks, and eventually they won’t have anything left to invest. It’s tempting for me to stray from my strategy, especially since I consider that I’m still learning. Part of investing is that real learning comes through doing, so I am actually using two strategies to invest my funds, a dividend-income strategy in my non-registered accounts and a sector rotation strategy in my registered accounts. Both work, but they serve different purposes, so I need to focus on not straying from my strategy and giving up profits.
Success is a function of consistently moving in the right direction. We tend to progress in fits and starts, moving two steps ahead with our good habits and, if we’re lucky, moving just one step back with our bad habits. Improvement can come equally from instilling good habits or from breaking bad habits, just like taking your foot off the brake and putting it on the gas when driving. Have you ever driven without taking off the parking brake? I suspect that’s how many of us handle our personal finances — good habits moving us forward and bad habits keeping us from going very fast.
What bad habits do you have that keep you from making progress?