Concentrate On Investment Factors You Can Control

March 24th, 2008 · No Comments · Subscribe to this feed

Sure, everybody wants to buy the next Microsoft or find the next super-star fund manager that will allow them to cruise comfortably into retirement without saving another dime, but what do you think are the chances of that happening? Probably no higher than winning the lottery or hitting the jackpot in Vegas. Instead of wasting time an effort pursuing the proverbial pot o’ gold at the end of the rainbow, it’s better to focus on what you CAN control in investing.

Minimize Expenses

Study after study shows investment expenses are the number one predictor of future returns: not past performance, but expenses. If you own an expensive actively-managed fund with an ER of 1.5% and an inexpensive index fund with an ER of 0.2%, which do you think is going to have the advantage? The actively-managed fund would have to out-perform by 1.3% per year just to break even. That’s a huge, almost insurmountable hurdle and the effects can be dramatic. Keeping that 1.3% for yourself rather than giving it to some hot-shot money manager would earn you an ending balance of almost 48% more after 3o years. Which would you rather have, $1 million or $1.48 million? Yeah, me too.

Get The Right Mix

Studies by Ibbotson and Kaplan verify roughly 90% of the variability of a portfolio’s returns is explained by asset allocation. Sure, which particular mutual fund you choose does make a difference, but it’s tiny compared to the difference your overall allocation between stocks, bonds, real estate, and other asset classes makes. Because of this, determining an intelligent asset allocation plan in line with your risk tolerance is cruicial to your long-term success.

Keep Saving

While you can’t control investment returns or your future spending needs, you can control how much you save. All else being equally, it’s always better to save more if you can manage it. Sure, after a certain point you reach a point where cutting your spending would lead to a severe decrease in your standard of living, but it’s all about balance. Most people have at least a few little luxuries that end up costing them a surprisingly large amount of money. My weakness is books. I love to read and even though I know I could check many of them out from the library for free, I prefer to own my own copy. What’s yours?

Control Yourself

Most important of all is your own behaviour. It is important to stick to your plan through thick and thin, even during a bear market when you’re likely to doubt the wisdom of the buy-and-hold philosophy the most. Unfortunately, this is where most people fail. They buy when times are good only to panic and sell everything at the bottom. Buying high and selling low is unlikely to make your rich. Without self-discipline, you have little chance of ever retiring wealthy.