5 Bad Habits To Avoid
Posted by: Brian Dennehy
[This was first published in November 2014. We re-print it today unaltered. It is even more relevant today than it was then]
The first series of teleconferences from DennehyInvest has just completed – thank you to all of you who participated, it was a great success. We covered a lot of different topics with the aim of improving your investing success. One that excited particular interest was “The 19 Habits That You Must Stop Now”, and here are some of our favourites.
1) Stop Buying Funds on a Whim
If you think back to the huge success of Woodford’s recent fund launch, much of that was driven by:
His profile as a fund manager
A very well choreographed marketing campaign
If investors had looked closely at recent performance they might have been less enthusiastic.
With the Christmas season coming up there will be more and more imaginative ways tried to convince you to part with your hard-earned money. Though the ramifications of gift buying are short term, the impact of an investment purchase "made in haste” will be with you for a long time to come. Still, it’s surprising how often people can be lulled into a false sense of security by a good marketing campaign. You have been warned...
2) Stop Obsessing Over Irrelevant Detail
Humans are predisposed to search out knowledge: we have an inherent curiosity. This can be a very unhelpful trait at times. We equate having more information with a better insight when often we “can’t see the wood for the trees”. Look at any fund factsheet and you can be overwhelmed by the volume of detail, most of which won’t help you when it comes to choosing whether or not you should invest in a fund.
Even metrics like consistency of performance will not help in isolation. Obsessing over irrelevant details will knock investors off course and just result in frustration.
3) Stop Obsessing About Charges
We have said this before: you’re better off choosing the best performing funds using a rational process than you are chasing cheap funds. For example:
Annual Management Charge (AMC)
Fund B: 0.75%
Fund C: 0.10%
Performance over 10 years
Fund X: +346%
Fund Y: +92%
As you can guess, Funds B and X are the same, as are funds C and Y. With a simple example it is easy to see the benefits of pursuing funds with better performance rather than funds with the lowest charges.
See our Dynamic Fund Selection process for more on why this works.
4) Index Trackers Are Not A Solution
You may recall the story of the missing £808k. This is a good example of the difference between buying an index tracker and having a process for selecting funds. In the last 5 year period to 26 November 2014:
Harry’s portfolio (using the UK All Companies sector): +124%
RBS FTSE 100 Tracker: +44%
A difference of 79.82%.
...which also feeds into the next bad habit...
5) Don’t Believe That All Funds Are The Same
As this latter example shows, they are not, and the difference between the best and the rest can be huge, and, if you get this right, genuinely life-changing.
Investors who can say with conviction that they are immune from the above bad habits are well on their way to greater investing success.
ACTION FOR INVESTORS
Check your bad habits. Are they holding you back?
Do you have a process for investing? If not, there’s no time like the present...