Investing can feel like almost like a sporting event, prompting dreams of dollar signs and the adrenaline kick of a slot machine. However, the best investing strategy is often the most boring.
“Winning the Loser’s Game.” That’s the name of the classic book by Charles Ellis, which no less than famed financial guru Peter Drucker called “the best book on investment policy” ever published. For those of you who, like me, still love the feel of a book in your hands compared to a device, this could be a profitable as well as a pleasurable investment of your precious time.
Ellis claims that investing is a loser’s game for individuals because we compete with professionals who devote all of their time and effort to this one area. Docs are focused too, but not in the financial arena. That’s one reason why one financial advisor after another tells me that we doctors are “the worst” when it comes to this vital area of our lives. For those of you raised on Cliffs Notes, I will give you a précis and then some add-ons gleaned from other sources.
Number 1 is Do Not Trust Your Emotions. We almost all over-react to temporary flips in the market up and down. Remember that past performance, especially the recent past, is not a substitute for fundamental principles.
Number 2 is put your investment goals and the program to achieve them in writing and stick to them. I know this immediately lets out a wide swath of you. And that is one reason why your results underperform expectations, let alone wants and needs.
Number 3 is do not do anything primarily for tax reasons. Tax is the tail that too often wags the dog. In spite of politicians wailing about the damping effect of taxation, successful businesspeople run their enterprises to be profitable whatever the tax situation of the moment is.
Number 4 tells us that we need a full-time, qualified, and trusted financial advisor. BUT do not think that even their obligation for fiduciary responsibility means that you can mindlessly turn over everything financial to them. It is, after all, your money and your life, not theirs. Watch the store and ask questions, lots of questions.
Number 5 from Ellis says never invest in commodities. Remember that stats tell us that only about 3% of those who do so on a regular basis make a living at it. The rest of us support the commodity broker’s lifestyles.
Number 6 says that even if you live in California, or some other real estate hot spot, your home is first and foremost a place to live, not an investment. Remember 2008?
Number 7, Ellis says, is to stay away from “interesting” investments. Some include the lottery (a recent news story told of someone cashing in their IRA to buy Powerball tickets), diamonds, gold mines in Costa Rica (true), viatical purchases (buying the life insurance policy of a dying person - ugh), movie or theatrical ventures (unless you are a hobbyist with money to lose for fun), windmills (true), and investing in “can’t lose” lawsuits (true). Unfortunately, this list is a very long one.
Number 8, from me, is avoid tax dodges such as off-shore accounts. Read the newspapers about the previously secret—now cooperating—Swiss banks, for instance. Hiding assets is asking for an unhappy outcome.
Number 9, also from me, is watch your financial fees like a hawk. In a low interest rate environment they will corrode your net worth from within. This also implies minimal trading—keep it to infrequent rebalancing of your diversified holdings, preferably in a tax-free vehicle. Studies show that quarterly is the most common, but they also point out that any interval makes little difference up to a year. Rebalancing cuts risk, they say, by about 20%.
Live long and prosper.