Investing Doesn't Have to Be Difficult
It took me decades to finally realize that I was making investing more difficult and complex than necessary.
When I opened my first investing accounts in the early 1980s, I had to learn what to do, so I turned to the accessible publications at the time, The Wall Street Journal, Money Magazine, and, of course, diligently watched Wall Street Week on PBS. I was a bit in awe of these, mostly men, in suits. They seemed to know a great deal and had confidence in their predictions of the future. The more time I spent digesting all of this, I began to think (a) that they must make a lot more money than I was making and (b) if I could figure out their secrets, I could do so much better. For a while, I truly believed that by analyzing economic indicators, one could "predict" the direction of the market, thus buying and selling at the right time.
Today, much more knowledgeable and less wealthy because of my ignorance, I still have to hold myself back from making things more difficult and complex than needed to achieve no worse than average. I remember looking through fund literature and online fund information, trying to size up the prospects for this fund or that fund. I didn't realize that these actively managed funds actually own many of the same stocks, just in different proportions. I didn't realize that the fewer stocks that they own meant that the performance would have greater volatility (larger highs some years and larger losses in others) than a fund with many more stocks. And finally, while the market operates in a rational way - increasing or decreasing prices based on supply and demand, people are irrational when gathered in a group until they realize they're irrational and correct themselves.
One analogy for this predicament is trying to be a weather forecaster, using the data from your phone's app to help you make decisions about what to pack for next week's trip. At first, you take in all the forecast data to guide your decisions until experience tells you the more important factors are seasonal and the jet stream producing High or Low pressure over the area. But instead, we keep looking at our phone, trying over and over again to get this forecasting right. If we just got into the habit of packing a rain jacket, an umbrella, a light coat, a sweater, long pants, and shorts, we would be comfortable regardless of changes in the weather. We would be prepared because we expect the unexpected and would not be surprised by the changes or think we need to do something else, like trying to find a store that sells umbrellas when it's raining. At the root of how many of us think about the world is forgetting that many things are driven by factors we cannot predict; thus, we focus on small details rather than the big picture. Instead of studying what the phone says about the weather in Chicago next week, step back and remember it's early springtime, so it could rain, be cold (or warm), and windy in Chicago. Then pack accordingly.
Successful investing is about pulling your eyes back away from the minute-to-minute details, noise, and predictions and instead being prepared for anything to happen. Which means wide diversification (prepare for rain, snow, or sunshine), income and growth (hot, cold, and warm), and rebalancing (keeping the right proportions of short and long sleeve tops and bottoms). This translates into setting an asset allocation appropriate for your age, then selecting a few but not too many funds across many sectors, sizes, and types, then rebalancing and always keeping them in your suitcase, so to speak. Then whatever happens, you're prepared and expect to encounter extreme conditions from time to time. If you do these simple things, you'll do much better than those who think an 80% chance of rain means it is definitely going to rain and only pack a rain jacket and end up being cold because you don't have a sweater underneath. And, you won't get caught without an umbrella, thinking you can solve your dampness problem if you can find an umbrella store before it's too late. As I said in Dad's Rule #35 - Don't Make Investing More Complicated than Necessary.