Simple, Right?

Investing successfully is easy to understand but hard to do. From a distance it might seem a relatively simple exercise to construct a broadly diversified, cost-efficient portfolio and dutifully add to and re-balance it over time. However, once inside the actual investment arena hurdles spring up constantly, thwarting attempts to execute on even the most common sense behaviours. A quick audit of any successful investing track record will reveal large chunks of time when the long-term result was “earned” by tolerating shorter-term bouts of boring, underwhelming and poor results. Sadly, the status quo sees most investors exiting during these periods—usually because of aforementioned hurdles—rather than grinding it out and realizing solid results.

Examples of common hurdles:

• Our own “beliefs of convenience.” Anchored in data that happens to support a position we may already have a financial interest in, these beliefs might be diminished somewhat if tested by any meaningful scrutiny or debate. Feel-good beliefs of convenience could include ideas such as the world is running out of oil, real estate only goes up, “Sell in May and Go Away,” etc.
• Really good salespeople. These pros are selling expensive and/or illiquid financial products that always seem more compelling than your current course of action. The sales process makes us feel sophisticated and special, but inevitably a veiled exchange of money is brokered—one which satisfies our need for “action” today and offers the prospect of an inevitably better result. Ultimately, however, real value often gets held up en route to the party thanks to a combination of high costs, forecasting gone wrong, and/or poor liquidity.
• Performance envy. This is typically triggered by random, unsolicited verbal eruptions from friends or family about a stock or fund or property that has done exceptionally well and is now irresistible. But remember: sprinting for two city blocks doesn’t typically affect your final result in a marathon, and may even hurt you in the end.

Basically, investment horror stories would be extinct if not for the steady deluge of distractions (a.k.a. hurdles) that appeal to our desire to “just do something, anything” when the chips are down. At the end of the day, successful long-term investing doesn’t really serve a dual purpose; it can’t also be a source of entertainment, artistic expression, or whatever other fulfilment you are looking for. Mountain bikes and music would be two good potential alternatives to consider if you want more action in your life. But your pension fund? Not so much.

This sentiment was reinforced by renowned investor Warren Buffet at his company Berkshire Hathaway’s recent AGM, where Buffet contrasted “hyperactive” investment behaviour with simply owning an index fund for 50 years. For fun, I produced a summary of a hypothetical investment made 17 years ago in RBC US Index fund and compared it with the average result of all US equity funds available to Canadian investors over the same period of time (Morningstar CAN US Equity index).

No spoiler here: the index fund result outperformed the combined average result of its competition, which included many more exciting, more expensive stock picking funds.

What Buffet didn’t discuss, however, is that realizing this superior return would require meaningful commitment on the part of the investor. Case in point: in three of the past 10 years, the index fund under-performed the average result of its competition—for an investor to remain with the strategy it would have required resolve, particularly when the fund under-performed in back-to-back years (2009-2010). Buying an index is simple. Holding it long enough for it to do its heavy lifting is another proposition altogether. And this is where staying the course and resisting barriers comes in.

The takeaway: you cannot purchase “easy.” You can, however, stack the odds of success in your favour and improve the likelihood of an above average experience via close attention to diversification, cost control, discipline and taxation. Once you are investing in real time, effort and force of will be required. I’m not suggesting misery will govern your investment destiny, just discipline. Kind of like eating healthy—not always fun, but the results will prove worthwhile and likely trump the alternatives, though perhaps not on the schedule you imagined.

So, the next time a distraction pops up in the path of your investment strategy, don’t take my word, or Warren’s, or 60 years of independent, peer-reviewed academic research as gospel. Just do what any prudent person would do, and consider these various perspectives before possibly inviting a setback into your game plan. Your bottom line will thank you.