A little introspection can go a long way. In this blog, we highlight 6 of the most common investor habits that we have observed over the past three decades. By breaking these habits, you can enhance your investment strategy and achieve better returns. Let's explore these habits
1. Avoid Impulse Buys: Stop Buying Funds On A Whim
Are you guilty of purchasing funds without proper research?
Avoid making investment decisions based on whims or reasons like advertisements or magazine mentions.
There are many reasons to buy funds – but buying funds on what is little more than a whim, isn’t one of them.
2. Stop Following The Herd
Many investors follow the herd, but all too often they wait too long and then join too late.
I have observed this many times since the 1980s. Perhaps the best example was the tech bubble of the late 1990s. The higher the returns from tech funds, the more people got on board.
The Dalbar Report in the US tracks every year the terrible timing of retail investors from year to year. For example, the 2014 report showed that over the last 20 years equity investors lost 4.2% EVERY YEAR compared to being in a plain index tracker. That is an extraordinary deficit.
The root of the problem? Joining the herd of investors far too late – buying high, selling low. This isn’t because you were trying to be clever – but rather you lacked confidence to buy earlier – then once the herd is moving, once the market is already a long way ahead, only then will many investors jump on board, full of confidence – but too late.
The herd of investors is very powerful, and as the momentum and confidence of the herd grows, this creates bull markets and upward trends, which can go on for years.
3. Look Beyond Charges: Focus On Performance
A basic command of maths seems to convince some that they can disengage the brain.
Fund B with annual charge 0.79%
Fund C with annual charge 0.11%
Which is the better fund?
Fund X up 195% last 10 years (after charges)
Fund Y up 70% last 10 years (after charges)
Which is the better fund?
In fact, Fund B is the same as Fund X.
The performance you observe day after day, whether on newspapers or online are all AFTER charges.
Do I want a fund with small charges and limited performance?
Or a fund with outstanding performance AFTER charges?
Surely, we all want to invest into a fund with outstanding growth potential AFTER charges.
4. Working Harder Isn't Always The Solution: Work Smarter
Often people spend their lives solving complex problems and expect to have to do the same with their investing.
It is similar to those who simply worked blooming hard all of their lives – you assume that investing must be equally hard work.
So, if someone brings you a solution which DOES NOT involve hard work, you tend to be sceptical.
This goes to the heart of whether you can generate more growth going forward:
- You do NOT need to work harder
- You DO need to work smarter
This doesn’t mean you have to have a big IQ. On the contrary as Warren Buffett said:
“once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble when investing”.
5. Index Trackers Aren't The Only Solution
This is an easy one to deal with.
If an investor exclusively invests in index trackers it is because:
- They are obsessed about charges (I’ve covered that one already), OR
- They believe investing is otherwise hard work (ditto), OR
- It is not possible to buy actively managed funds which are consistently above average (this is covered here in "The Mystery of the Missing £1,421,160" )
In brief, we show that an investor - Harry - outperformed the UK Growth sector average by £1,421,160. An index tracker also beat the average but was relatively terrible!
6. Break The Mold: Think Differently
Albert Einstein said you cannot solve problems with the same thinking that created them.
So, STOP thinking like you do now – LET GO of those habits that you have got into, perhaps over many years.
Be honest with yourself and be disciplined.
Above all start putting this “Stop Doing” list into action now, because through practice you will make progress.
As Gary Player, the hugely successful golfer of yesteryear, said “The more I practice the luckier I get”!