Smart Investing Is Simple, But That Doesn’t Make It Easy
I can teach you to thrash the performance of most professional traders. That might sound crazy, even boastful. But it’s true. You can trounce the performance of most hedge funds. You can leave most tactical asset allocation funds gasping in your dust. Yes, I know: These professional traders keep their fingers on the pulse of the economy. They strategically move money around.
When they think the economy is in a rut, they might jump into gold or cash. If they think Donald Trump will beat Biden in the upcoming U.S. election (or vice versa) they might adjust their money. If they think Europe or America’s debt woes are out of control, they might pour money into Asia or natural resources.
Ironically, this is why professional traders are easy to beat. Most of them ignore academic, peer-reviewed evidence. Studies suggest investment portfolios are like bars of soap. The more you mess with them, the small they will get. To outperform about 90 percent of investment professionals over your lifetime, you just need to do three things:
1. Build a diversified portfolio of low-cost ETFs.
2. Add to your portfolio every month. If you get a windfall of cash, invest it right away
3. Ignore the temptation to tinker with your money. Don’t try to time the market.
By following these three rules, you can thrash the pros. This isn’t one of Donald Trump’s fabricated tales. Mountains of peer-reviewed economic evidence support it.
Step 1 is easy. Build a diversified portfolio of low-cost ETFs.
But Steps 2 and 3 foil plenty of investors. Since writing my books, Millionaire Teacher and Millionaire Expat, I’ve received plenty of emails from readers. When markets are rising, they ask general questions. But they confidently say, “Yes, I can stay the course!”
However, when the economy sputters or the markets go squirrely, emails read like this:
“Dear Andrew, I read your books. I know I shouldn’t time the market, but this time it’s different because…[fill in your speculation du jour].”
The fund rating company, Morningstar and Dalbar’s Quantitative Analysis of Investment Behaviour use different methods to determine how investors perform. But the ratings firms have one thing in common. They both reveal that investors speculate more often when stocks dip and dive. Instead of staying the course and investing every month, more investors keep cash on the side. More investors trade in and out. More investors shift their allocations.
Morningstar and Dalbar’s analyses reveal that through this speculation, investors earn less. They underperform the market and the very funds they own. Staying the course, instead, is the best long-term solution.
In Millionaire Expat, I fantasized about a mind-control world where I could help investors. I wrote:
“When stocks hit all-time highs, you wouldn’t know. When experts on TV predict the next market crash, you would fall into a trance and hear a soothing Celtic song. Many people are addicted to looking at their investment performance. But don’t bother looking more than once a year. In my mind-control world, if you looked more often, I would flick a mental switch to make you scratch your crotch in public.”
So, here’s my advice.
Don’t listen to economic news. Ignore stock market moves and predictions about COVID-19. When you have money to invest, invest it right away. No, this isn’t sophisticated. But when it comes to investing, decade after decade, simplicity wins. The biggest question is, “Do you have the mental mettle?” Smart investing is simple. But that doesn’t make it easy.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.