Investment Heroes Don’t Flinch

Everyone has an investment hero. At least, some investor whose investing approach or trades we follow.

Investment heroes

There’s John “Jack” Bogle, the evangelist of buying entire markets to fill an asset allocation. Think buying a US fund that mimics the S&P 500, an Asia ex-Japan one that stalks the MSCI Asia ex-Japan index, and you’ve got the idea.

There’s George Soros, the hedge fund manager with killer instincts on when the winds change. The problem with his secret: he relies on killer backaches to signal these turning points. Few of us have such fortune-telling ailments.

Then there’s Warren Buffett who preaches buying businesses (not just stocks) you understand, buying them cheap, and hanging on to them for a long time. Even Warren Buffett has his own hero: Benjamin Graham, the godfather of value investing, or the idea of buying stocks that are cheaper than they should be.

No matter who it is, there’s one thing they have in common: they stay above the ‘noise’ of news. They’ve found a way to get out of the trap that nearly all investors fall into – letting emotions rule, or as some say, the ‘Behaviour Gap’.

Every day, we are accosted by headlines: on the front pages of news papers, web portals, scrolling across the screens of TV breakfast shows. The weekend papers are full of advertisements for Get-Rich-Easy seminars. And the media sensationalises the “flavour of the day/week/month” to drum up viewership. And as more people get excited about an investment idea, even more get sucked in.

As investors get more excited about an idea, they drive up prices. And those who’ve held back get tempted, and jump back in. Which pushes prices even higher. And the cycle goes on. And one day, something changes. It usually comes unannounced. But when that happens, returns fall and investors stay in disbelief, but finally dash for the exit.

And this shows in the data. Investors bought bond funds in 2006 and 2007 only after prices rose. And since the Global Financial Crisis in 2008, investors have continued pouring in as high-yield bonds became more popular in a period synonymous with the ‘search for yield’. And the outflows since 3Q-2013 comes after prices fell quite a bit.

That sounds very depressing. How can investors deal with this ‘noise’?

  1. Think about what you want to do. Retire on SGD10,000 each month? Send your children overseas for their university education?
  2. Calculate the amount of risk you’ll need to take to achieve these goals. We’ve got all sorts of calculators to help with these sums.
  3. Look at the gap. Are you able to take the kind of risk necessary to grow the initial pool to however much you’ll actually need? If not, reality is something has to give. Perhaps retire on an $8,000 income. Select a more affordable overseas university (Australia’s now the most expensive). Or go local!
  4. Write a game plan. Look for a portfolio that is designed to give the kind of returns you need.
  5. Review the plan once a year. If the portfolio looks vastly different from the game plan, get it back in line. This is what the finance professionals call “rebalancing”. It takes the guesswork out of investing, and saves you from allowing emotions to interfere.
  6. Repeat until you need the money.

Done carefully, your portfolio should parachute you within reach of your goals. Finally, be content. Fear and greed are the two emotions responsible for the downfall of any investor. Scrambling out of markets every time prices fall is as dangerous as buying into any get-rich-quick scheme.