Pic Leigh Henningham for the Age Ipad. 2014 Port Phillip Bay Scenes. A lazy man watches volley ball at Middle Park beach. aIt seems counter-intuitive but unlike most endeavours in life the less work someone actually puts into investing, the better they do.
At least that’s the conclusion drawn by Chris Brycki, the chief executive of Stockspot, an online investment adviser.
He reckons if you listen to all the market news and tipsters to give you an edge, you’ll probably just be befuddled.
He points to a study showing that over the past 30 years the average share market investor in the US earned a return of just 3.7 per cent per year compared with an annual return of 11.1 per cent for the market.
Those investors who read and researched ended up giving away returns by making bad decisions and perhaps chopping and changing their portfolios and generating higher costs.
The “lazy” investors who bought the market, tripled the returns of everyone else.
Shane Oliver, the chief economist at AMP Capital Investors, has written on how the combination of a massive ramp up in financial information with our natural inclination to zoom-in on negative news is making us worse investors: more fearful, more jittery, more short-term.
As Oliver points out, there’s an increasing availability of information and competition among the media to attract clicks, which magnifies perceptions around various worries.
One of the biggest effects of this is “loss aversion”, where a financial loss is felt much more than a financial gain of the same size.
Oliver argues this leaves us biased to be more risk averse and it also leaves us more influenced by bad news stories as opposed to good news stories.
As I have written recently, that can mean missing out on investment returns.
So how can these natural traits of our brains, such as the “fight or flight response”, be countered?
From Oliver’s tips I like these oldies because they are also goodies. That is, invest for the long term and be aware that investment markets move in cycles.
He says the trouble with cycles is that they can throw investors out of a well thought-out investment strategy that aims to take advantage of long-term returns.
Another is to turn down the noise and resist the temptation to check your investments too frequently.
To these I would add that it’s important keep the fees and costs down. Just as the investment returns compound over time, so do the expenses.
While Investment markets returns are out of the investors’ control, the costs are within the investors’ control. And if you cannot ascertain all of the costs, walk away from the investment.
Favour simplicity over complexity. Complex investments favour the provider and leave the investor at a disadvantage.
Complexity also makes it easier to keep the fees and charges hidden from the investor.
Finally, don’t be enticed to invest mainly because of the tax breaks. While tax breaks can be nice to pick up along the way, the potential for the investment to produce returns should always come first.
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