For a long time I thought my personal investing skills were excellent. I pored over analytics, and kept on top of the news from world markets. All the while there was one investor who consistently crushed my returns. That person, my dad, managed to beat me with such high-tech tools as a magnifying glass and the investment section of the local newspaper that comes out every Saturday.
After getting whipped on returns for 15 years, I finally decided to see how dad did it, and to bring my investments into line with those principles. Turned out dad had a relatively small number of rules he followed consistently over the years and, when I started following those rules, my returns improved almost immediately. It still wasn’t as good as dad’s, but at least I was getting beat by a narrower margin. Here are six of the guidelines dad uses for investing.
Dollar Cost Averaging — It Works
It’s also known as the “constant dollar” method. Instead of buying a large lump sum of a particular fund or equity position, the investor works his or her way into a large position by buying a fixed dollar amount at regular intervals over a long period of time. This disciplined approach spreads the cost basis out over the ups and downs of several months or years. Notice that every stock and fund features a 52-week high and low cost. Dollar cost averaging keeps you in the average of that range, instead of committing your entire buy at what later turns out to be the 52-week high.
You Go to the Doctor Once a Year but Check Your Stocks Daily
Timing is less important than time. My dad checks his investments once a week and makes changes, if any are needed, once a quarter. Over-management of your portfolio can result in increased fees and missed opportunities. When you try to outperform the market by buying and selling on small margin trades, you’re putting yourself up against high-speed programmed market trading — systems managed, literally in some cases, by MIT-educated rocket scientists. Accept this fact — you can’t, as an individual investor, beat those people at that game.
Recessions Happen Every Five to Seven Years
As the S&P 500 chart from the St. Louis Fed shows, recessions and market contractions are regular features of the investment landscape. Yet, every time a big crash happens, it seems to come as a total surprise to a large swath of the people invested in equities. If you’re following a disciplined and conservative strategy of dollar cost averaging, then you’ll be making small, regular buys during the crash and on the way back up. Bizarrely, instead of buying low and selling high, a large number of people will panic, sell at the bottom, and then stay out of the market during the recovery.
What You Pay Is More Important Than What You Buy
Investments have fashion trends that ebb and flow. Remember last year around this time, the financial entertainment industry was ripping on Spain? The iShares MSCI Spain ETF (EWP) was trading at its 52-week low of $27.50 in July; investors were writing off Spain and other emerging markets. What a difference a few months make; today those same shares are trading at $41.09 — and those who ignored the financial entertainment blather not only saw share prices nearly double, they collected a nice quarterly dividend through the whole cycle. Financial entertainment shows are great for keeping tabs on what’s out of favor. Whatever is the ugly baby of the day featured on cable financial shows is what I’m buying. Whether it’s emerging markets, gold, or industrial chemicals, whenever the news is gloomy, that’s the time to go shopping.
You Can’t Predict the US Economy
The more you think you know what’s going on, the more likely you are to be one of the suckers. Conformation bias means you’ll be more likely to remember the times you knew a week in advance that the market was going to crash, than all the times you were wrong. In 2005/2006 I had my real estate license, and didn’t like what I was seeing in the housing market. My wife and I sold all but one of our homes mere months before the market crash. That one bit of sheer dumb luck in investing gave me a false sense of security that was more of handicap than a help. No one can predict something as large and complex as the US economy. At any given time there will be people saying “buy, buy, buy,” and someone else saying “sell, sell, sell.” One of them is going to be right, but only in hindsight.
Change Your Mind When the Facts Change
One of the more dangerous trends in America is the gradual replacement of data with corporate dogma, and that applies to a far wider number of topics than investing. Somehow, over the years, we’ve replaced the need to be accurate with the need to be right, a change that’s crippling returns for many small investors. To get consistently good returns one must be malleable by the facts; new data has to be able to change your perspective. Otherwise, you’ll hang on to underperforming investments far too long, and hurt your returns.
It’s tempting to listen to the folksy witticisms of someone like Warren Buffett and think investing is easy — but it’s not. What is easy is for Mr. Buffet to sound informed, because he has a staff of junior research analysts and account managers at his disposal, constantly monitoring every aspect of his investments. You don’t have those resources, so don’t think for a second that you’ll be able to match the performance of professional fund managers.
What you can do is play long ball and implement a consistent, long-term, disciplined strategy that will yield excellent returns over time, just like my dad.