My father was one of the smartest people I have ever met.
He was also one of the dumbest investors.
The two facts are related.
He went to NYU on a full scholarship, finished his studies in two and a half years and, after graduating, taught cryptology in the army – and was convinced he could outsmart the stock market.
Dad always bought penny stocks from companies that would “change the world” or invested in dodgy tax havens that always triggered an IRS review, and he believed he could time the market.
One reason he was so hectic in his deal was that he had time to do it. He has held senior marketing positions at several large insurance companies, jobs that he did not find particularly stressful and that gave him plenty of free time, and which he often used to “play in the market.”
I am nowhere near as smart as my father. But now, like him, I have free time during the day because I realize that I have enough money to reduce my workload.
And because I like business and finance, I spend more time paying attention to what is going on in the market. For example, I’ll see or read something interesting about the transportation industry and say to myself, “I wonder if I should buy X.” And then there will be a feature for an aspiring online retailer and I’ll say, “I should keep an eye on it and maybe buy a bath.”
Then I’ll think of my father’s impulsive investment approach and find that I’m about to follow in his footsteps. I pause and remember how I developed my own self-taught approach to investing and already put in place a plan to keep me from acting too often.
I started in my late twenties when I had some money (and no kids). I didn’t know enough to pick individual stocks, so I figured mutual funds would be the way to go. When researching what to buy, I was stunned to learn that the most actively managed mutual funds never outperformed the benchmark against which they were measured, a reality that remains true to this day.
That meant if I could just hit the benchmark – mostly the S&P 500 – I’d be ahead of the majority of investors who listened to the underperforming professional advisers. I firmly believed in a relatively new idea at the time – index funds. I remain a big fan.
As I compose my portfolio – which is now 65 percent stocks, 30 percent medium-term bonds, and 5 percent cash – the vast majority of everything I own is still in index funds. They are passively managed, which means that neither I nor the fund manager have to do anything. No frequent trading is required.
When I told my father in the late 1980s that I was investing in index funds, he was appalled.
“If you just hit the benchmark, you get an average return. Why do you ever want to be average “He asked.
“Well, Dad, that would still get me in front of the most active investors.”
“Yes, but certain people outperform the averages. I plan to be in this group. “
Certainly people outperform the market, but I don’t know many who do this consistently. My father wasn’t one of them.
Here’s what I do to avoid shooting myself in the foot.
It would be nice to think I could set up my portfolio right and then forget about it, but the world is not that simple. A sudden surge in stock prices could result in my having more money than I would like in stocks, for example. Conversely, a fall in prices could mean that I have too much of my money in bonds.
But to make sure I don’t mess around excessively with what I own, which could add both trading costs and taxes, I decided to make investment decisions only twice a year: January 1st and my birthday, July 15th. (I would have made it on June 30th, but I won’t forget it that way.)
For these two days I will sit down and evaluate both my asset allocation and my individual holdings and only change what I absolutely need. This year, January 1st, I was happy with my portfolio, so I didn’t do anything.
I still plan to read the business press and watch the occasional financial television show, but I have made a commitment to only trade on those two days.
When I think about my father’s approach to financial planning, I find that he was essentially gambling.
I have nothing against gambling. But I hate losing money. For this reason, I’m going to limit my gambling to the blackjack app that I just added to my phone. I’m going to bet with play money so I’m not really going to win money. But more importantly for me, it will be impossible for me to lose real money.
I can live with it.