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Changing How We Think About Investing

Ser Jing - Here's A Better Way to Think About Investing (pic)

It’s time to change how we think about investing.

It’s not a game. It’s not a get-rich-quick scheme. It’s not an opportunity to display gravitas or irrationally masculine risk aversion.

Or, at least, it shouldn’t be these things.

It’s your retirement. Your children’s education. Your future. Their future.

These are noble objectives that won’t be realized haphazardly.

What we do and don’t know about investing

There’s a lot about investing we don’t know.

In the first place, it deals with the future, which, despite our best efforts, is entirely unpredictable.

On one hand, it’s reasonable to expect that the American economy will take flight on yet another multi-decade boom akin to the post-World War II era. At the same time, it’s equally reasonable to conclude that things will sputter and plateau on the heels of a slowdown in China and continued malaise in the USA.

And Singapore, being so tethered to global economic giants such as the aforementioned, would likely find herself charging ahead with massive tailwinds behind her back, or trying her best to take baby-steps forward while facing huge headwinds.

Beyond this, we don’t know how well most individual investors have performed in the past. We know it’s bad, but we don’t know how bad.

Meanwhile, there’s a lot about investing that we know.

Multiple studies suggest that most American investors – if not the vast majority – dramatically underperform the S&P 500 Index (a widely followed American stock market index). Much of the blame for investors’ poor results lie in the behavioural biases and human emotions that make most of us bad investors.

Given the universality of how humans feel, it’s not too far a stretch to see how Singaporean investors might also have dramatically underperformed the Straits Times Index (SGX: ^STI). That’s especially so when confronted with evidence of how investors here often pick the wrong choices over the short-term or fail in their guesses of the index’s movements.

Frequent trading yields commissions that erode profitability (especially when local brokers can often charge up to a minimum of S$25 in commissions for each trade!). Emotions lead us to buy high and sell low. And a whole slew of systematic behavioural biases compromise our decision-making process.

The question, in turn, is: How does one insulate a portfolio from the pernicious effects of these realities? How does an investor at least match the otherwise stellar long-term performance of  the STI?

Thinking differently about investing

When many people (young investors in particular) think about their stock portfolios, they think about an assortment of individual stocks with perhaps a smattering of broader unit trusts or exchange-traded funds to add diversity.

The general rule, in this regard, is ownership of individual stocks. The exception consists of fund holdings.

And herein lies the problem: The emphasis of these two things has been reversed.

The essence of any investor’s portfolio should be broad market holdings akin to, say, a low-cost ETF that tracks the STI.

In addition, these holdings should be allowed to mature over long periods of time. Trading in and out of stocks and the market is for novices and is almost certain to result in lacklustre performance.

By contrast, the exception to this rule is the purchase and ownership of individual stocks. This should be done sparingly and opportunistically. Buying only one stock a year would not be unheard of or altogether inappropriate.

At the end of the day, this is the path to wealth multiplication. Do you have the discipline to execute such a boring but profitable strategy? If so, you’ll be justly rewarded for the effort.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by John Maxfield and first published on fool.com. It has been edited for fool.sg