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.
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.