9 Secrets of the Empowered Investor, Part 3

This post is the third of three that outline nine critical factors in investment success, as identified by Keith Matthews, a portfolio manager with Tulett, Matthews & Associates in Montreal.

7. Most investment strategies don’t survive for long.

Every year sees an explosion of new investment offerings, innovative strategies and brilliant managers promising big returns. During your investment lifetime, however, the vast majority of them will not survive. Most funds will be merged or liquidated, leaving unitholders to look for the next winning strategy. Often investors will find themselves jumping from one loser to the next.

Even if specific index funds and ETFs occasionally shut down, the asset classes they track will always survive. Using a passive investing strategy benchmarked to the major indices can significantly reduce “survivorship risk” in your portfolio and produce a more consistent long-term investment experience.

8. The industry has conflicts of interest.

Successful investors face many roadblocks on the road to financial freedom. One of the biggest is the conflict of interest that exists in the financial services industry.

Advisors who are paid commissions based on the products they sell may have a disincentive to act in the best interest of their clients. Many advisors are also limited to offering only their firm’s in-house family of funds. Fees are often hidden so investors may have no idea how much they are paying.

If you use an investment advisor, look for one with a fiduciary responsibility, which legally requires the advisor to act in your best interest. Use an advisor who is  compensated by fees (whether billed hourly, or as a percentage of assets under management) rather than by commissions.

9. Humans are not hard-wired to be good investors.

Emotions and cognitive biases are often an investor’s worst enemy. Fear, greed, loss aversion, overconfidence and hindsight bias can often lead smart people to make costly investment mistakes.

We can’t switch off our emotions, but we can make an effort to understand how the mind can play tricks on us, and how our personal hang-ups about money can lead us to make irrational investing decisions.

The structured portfolio approach used by index investors makes many decisions automatic, reducing the chances of falling prey to your emotions. Using an Investment Policy Statement can also help you maintain the discipline you need to reach your financial goals.

See also:

9 Secrets of the Empowered Investor, Part 1

9 Secrets of the Empowered Investor, Part 2

14 Responses to 9 Secrets of the Empowered Investor, Part 3

  1. Glen June 11, 2010 at 12:28 pm #

    Great series! Lots of info to absorb and try to put into practice here.

  2. gpsguy55 June 11, 2010 at 1:21 pm #

    “Flavour of the month” is rampant in the “industry”, a great way to suck more people in , ie. increase sales, is to change the name of the same product or call it “new and improved”.
    I wished I had learned earlier that a mixture of ETFs and Dividend stocks work well but that didn’t come from the “industry”, it came from sites like this that provide reviews of good investing books and strategies that help DIY investors. Thanks

  3. Marz June 11, 2010 at 2:49 pm #

    Great series. I think there should be a big giant emphasis on “greed” in #9. There’s a lot of people who stay in the stock market too long because they want to “make more”. Set a goal and stick to it! That’s why I like this whole couch potato strategy 🙂

  4. ig June 11, 2010 at 4:19 pm #

    Excellent series! Thank you!

  5. Tom June 11, 2010 at 7:07 pm #

    Great series. Wish I had known only a fraction of this when I was twenty instead of sixty.

  6. Analyst Analyzer June 12, 2010 at 8:32 pm #

    Very concise, really good information here.

  7. Financial Cents June 13, 2010 at 7:14 am #

    Great to read #7, #8 and #9…especially #9!. No doubt our emotions tend to get the better of us with investing. Like most things in life, a disciplined plan that can be executed more often that not averts heartache and rewards responsibility. Excellent series!

  8. Marina June 13, 2010 at 5:45 pm #

    Great series, thanks!

  9. David June 15, 2010 at 8:37 am #

    Again thanks for the great series of posts. Very informative!

    I was wondering if you explain the difference between Close-End Funds (CEF)s and ETFs. My reading thus far has left me still totally confused on the subject. Other than actively and passively traded I can seem to find much else.

  10. Canadian Couch Potato June 15, 2010 at 8:09 pm #

    David: A closed-end fund has a finite number of shares, which means that if you want to buy some, you need to buy them from another investor (which is done on an exchange). Closed-end funds are usually set up that way because the fund’s strategy is not “scalable.” For example, a venture capital fund or a small-cap fund might not be able invest billions because there aren’t enough opportunities.

    Closed-end funds may be illiquid: if you want to sell your shares, you may be able to do so only if another investor is willing to buy them from you.

    An ETF, like a mutual fund, is open-ended, which means that any time new investors want to buy in, the fund creates new shares to accommodate them. In the case of ETFs, you buy the shares on a exchange, but you’re not necessarily buying them from other investors. You may be buying them from a “market maker” who creates the new shares as necessary. An open-ended fund is completely scalable: it will accept as much money as investors are willing to contribute.

    ETFs and mutual funds (with a few rare exceptions) are completely liquid: you can redeem them for cash at any time.

    Hope that helps.

  11. David June 16, 2010 at 12:29 pm #

    Yes, it does help. Thanks.

  12. Linda June 18, 2010 at 3:00 pm #

    Thanks for posting this great series. It made a lot of sense and was informative. I especially liked the charts that supported some of the points made.

  13. Caleb June 23, 2010 at 5:25 pm #

    Thanks – this series made the prospect of DYI investing less overwhelming.

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