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Monday, March 27, 2017

What NOT to do

Posted by Robert on June 18, 2012

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?

Comments

14 Responses to “What NOT to do”
  1. mike crosby says:

    I love your first paragraph.

    I know you’re against (or just not “pro” shall we say) veganism as a way of eating, but for me, it’s also something that is hidden that I just don’t have to worry about. CRP, A1C, BP, Total Cholesterol are all numbers that I can pretty much know they’ll stay excellent as long as I maintain this way of eating.

    And as far as investing, I’m pretty much that guy that’s made all those mistakes. But even so, I’m OK with it. I would rather make mistakes and still be in control of my money. And hopefully, as time goes on, I get a little bit better at it.

    Thank you for your excellent blog.

  2. Jacq says:

    “Boring, over-looked and underloved” … but making money… sounds good to me!

    I’m trying to understand this “buy high, sell low” mentality, but it doesn’t make sense. Like I keep hearing that people do that, but it just seems so odd.

    What do you use as your benchmark Robert – or do you use anything?

    Also – what do you say to people who tell you things like “you’re way better off investing in index funds” (implying you’re an idiot)? You try and tell them you’ve beat the indexes for the last number of years but they’re just deaf to that and say it can’t be done. Or maybe just keep quiet and laugh all the way to the bank / market?

  3. Robert says:

    Jacq, when people ask about index funds, I see two options. If they’re implying I’m an idiot, I treat it as a rhetorical question, because they’re really not open to a conversation, they just want to harp on their opinion. If it’s an honest conversation, I agree that index funds have their place, but I point out they’re not for everyone, all the time. One point that I almost included in my post (but didn’t want to start a flame war) was: Don’t try to save money on MERs by spending more money on commissions trading ETFs. In a relatively small account ($20,000), discount commissions can be $25 per trade ($50 to sell and buy something new), which adds up to more than 2% before you’ve made changes 8 times. My TFSA account is in this category.

    I use the TSX as my benchmark. Unfortunately, I lost all my trading history when I switched brokerages, so it’s not easy to compare my performance. Still, I know it’s possible for people who are educated and motivated to beat the market. Most people with some money set aside simply don’t want to be professional investors (and may as well own index funds if they’re not going to jump in and out of the market based on their emotions).

  4. DT says:

    Hi Robert,

    Good post, great website.

    To follow-up on your checking your portfolio weekly and on stock picking, I know when and where I’m outgunned by the professionals and I take the easy road, ETFs and couch potatoes. I could try to explain all the great advantages but the simplest way is to direct anyone interested to one of the many great short articles in David Chiltons new book “The Wealthy Barber Returns” The story called “Incredibly Interesting Math” sums up all the reasons why ETFs/couch potatoes and fees matter. In my opinion checking your account weekly is 51 times per year too many.

    Thanks again and have a great Day!

    DT

  5. Jacq says:

    I read The Wealthy Barber back in maybe 1998 or so. Thanks to not looking at my accounts or paying much attention to funds or stocks – or anything about investing other than some advice about investing in tech stocks because they were “hot” and “sure to grow” – I lost most of my son’s RESP and a huge chunk of my RRSP in 2001. Never again will I not pay attention to something I’ve put so many hours of my life into building. I’d talk to my portfolio every day if it would make it grow bigger. Well, I sort of already do. :-P

    Thanks for the advice Robert! Another question – do you invest your kids’ savings? My youngest is nagging me to invest his savings for him and I checked out dripinvesting.org. I think 10 or so shares of Tim Horton’s might quiet him and give him something to track like mom does but it sounds like a bit of a hassle. Can I buy some shares and then sell them to him? I was also thinking of giving them as presents (not my idea – that’s what he’s asking for.)

  6. DT says:

    Jacq,
    if you didn’t judge a book by its cover, you might actually learn something this time. Regarding your savvy at stock picking, do you think you can outpick Buffett, Munger and Soros?
    Than you’re a better investor than I and you should have nothing to learn from the “Incredibly Interesting Math” article.

    By the way, that guy Buffett endorses ETFs for the non-financially astute investors … “The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you’ll be buying into a wonderful industry, which in effect is all of American industry,” Buffett told CNBC anchor Liz Claman.

    … but you know what, on second thought, I think you have Buffett beat by listening to a stock pick from your kid and a .org website. Definitely creating investment genius in your house. Maybe you could use your library card a bit more and figure out how to ‘sell’ some stock to your 8 year old.

    Just pointing out … how ridiculous you appear.

    ***Darren, please let’s remain civil. Robert***

  7. Robert says:

    Hi Jacq, my oldest is seven and can’t bear to save money. He even tries to spend my change. I figure it’s a phase that will give him a feeling of control over money before I start forcing him to save a portion. But their RESP is invested. My smallest account is my TFSA at $10,000. At that size, I only own one or two stocks. If your son has enough money for 10 THI, that’s about $500. A $25 commission would be 5%, far higher than the MER of a mutual fund. You could either buy him a mutual fund (if he needs his own investment), or “sell” him some of the stock in your account. In that case, he would have 10 of your 200 THI (as an example), and you’d pay him whatever they’re worth when he cashes out.

    As far as DRIP investing, since you’re already have investment accounts, you could probably open an additional account In Trust For your son (that’s the jargon). In it, you could buy stock and ask the brokerage to enrol the account in the DRIP for that holding (check they can do it BEFORE you buy). Also ask what they do about fractional shares (this might depend on the holding more than the brokerage), where you might get cash or you might get nothing. If it’s a case of rounding down to the nearest whole share, you might pick a lower-cost share or wait until the balance is large enough to make sense.

    If you open a separate account for your son, the easiest way to sell or gift shares to him would be to have the brokerage transfer a couple of shares (that you already own) from your account to his. This will affect your taxes, and any dividends he earns are taxed back to you. Dividends he earns on his dividends are taxed to him. It can be quite a headache to report properly. If you still have questions, you can contact me through email.

  8. Hamiltonian says:

    DT’s bang on, and my initial thought when reading the post was the same: it’s incredibly bad to check the market daily, but just as bad to check it weekly.

    The section of Chilton’s book is very interesting, and should be considered very carefully by anyone hoping to invest. I can’t disagree that it is “possible” for educated people to beat the market, but only because almost anything is possible. The fact of it is that all of us are at least at times guided by emotions, and trying to time a market that already knows at least as much as you do, is not the best course.

  9. Robert says:

    Hamiltonian, you and DT are both talking about “non-financially astute investors”. When a person invests solely on emotion, hunches or first impressions, the frequency with which they check the market, or their investments, will not influence the outcome. Jacq and I are talking about well-informed, experienced investors. Frankly, the frequency with which I check my investments and the investment choices I make reflect my individual situation and my needs.

    Thanks for remaining respectful and sharing what works for you.

  10. DT says:

    You’re very correct Robert, I think I may have let my own emotions get away from me there.

    Truly as Jacq said, she has spent a lot of time to make her money and she is comfortable picking stocks based on her own paradigm. Good for her to be doing at least that, many don’t even bother saving, never mind investing. My comments were to provide some perspective that in my view helps investors that spend 40+ hours a week doing something other than investing, or gambling with their hard earned money.

    Jacq, doesn’t have to buy in since it is her and others emotional trading that allows me to capitalize on my re-balancing of the portfolio when the markets get jittery. This rebalancing is what FORCES me to Sell High and Buy Low. Chilton in his article just shows you why you should to do it and take the gambling out of what too many call investing.

    My apologies to yourself Robert and to Jacq if my comments were cutting or personal, they weren’t meant to be. I’m just a very passionate investor using the asset allocation and re-balancing approach that has made me a self-made investor at 38 and I will very easily retire by the age of 45.

    All the Best,
    DT

  11. Robert says:

    DT, your strategy and advice are appropriate for most people who invest their savings. As such, I’m glad you shared your perspective. Thanks for commenting, and I look forward to seeing your insights on future posts.

  12. Jacq says:

    DT – no hard feelings. I like your sense of humour.

    Robert – I wouldn’t worry about your little guy, he sounds just like my oldest was at that age (I should have bought shares at Toys ‘R Us – lol). It’s hard for kids that age to not feel money burning a hole in their pockets and I think it’s wise of you to let him have some agency over his own money (AND to enforce some savings when he’s older). ;-) Patient modeling pays off, it’s just that you don’t see it taking effect until they’re a bit older.

    Thanks for the tips on setting up an account for my little guy.

  13. Hamiltonian says:

    When you said “Thanks for being respectful,” did you mean to say that I wasn’t?

    My thought is this: you tried to say that checking once per day is something “not” to do, but checking once per week is something to do. I can’t see what sense there is to this: if you are an active investor trying to time the market, the more frequently you monitor your holdings, surely the better. But, also, you did not call your post “What not to do in my specific circumstances.” It’s easy to say that what works for you works for you, and should not be construed as advice. But you were trying to give advice and, for at least half of all investors (and I would say a lot more than half), it is bad advice.

    It is not very good advice to tell an emotional being who is using hard-earned money that he or she hopes to use in very emotion-driven ways: “invest coldly.” It is not very good advice to tell a fairly average individual with access to about the same information as the rest of the market: “be well-informed.” The market already knows what you do.

    It’s not important to me that you have a certain way of investing. You seem to have given it a lot of thought, so good on you if you are comfortable with your level of involvement. But it is a disservice to a lot of people to imply (or say) that checking the markets x number of times is bad, but checking it y number of times is appropriate. Indexing and passive investing is the best course for the overwhelming majority of non-professionals.

  14. Robert says:

    Hamiltonian, I sincerely appreciated your respectful tone.

    Never checking up on your investments is irresponsible, even if they’re on auto-pilot. It’s my opinion that yearly is too little, but it might work for some people. In my opinion, even on autopilot, 3-4 times per year is more appropriate. At the same time, a person should check up on their spending, budgeting, saving and net worth.

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