There are many ways to financially disable ourselves, most are obvious:
- Spending more than you earn = debt.
- Not protecting your family if tragedy strikes = double tragedy.
- Not putting aside for retirement = relative destitution in retirement.
- Not putting aside from pay packet 1 = much more has to come out of pay packet 200.
- Etcetera.
A less obvious bad behaviour is “fiddling”, where investors tinker with their portfolios.
This Morningstar report looked at investor returns from 2010 to 2020. Those investors, on average, earned 1.7% pa less than the funds they invested in.
The funds returned 9.4% pa, the average investor got 7.7% pa. The difference between those two numbers is 18%.
18% of the total available return was lost EACH AND EVERY YEAR.
£500,000 could have become £1,343,000, instead it was £1,130,000. That’s a £212,000 difference or £21,200 pa.
While private investors fiddle, their portfolios burned.
We fiddle everywhere, all the time; it’s human nature to do so. And it’s mostly in response to what just happened. It’s easily understood, less easy to resist.
- Kid’s peas flying across the room? Might try beans next time.
- Last 7 iron was a shocker? Surely the 6 will be better.
- Bad economic news? Sell shares.
- Good economic news? Buy shares.
We have a visceral need to act, do nothing is nigh on impossible for humans.
Reacting to what just happened means chasing our tails. And we make it worse giving more weight to what happened yesterday compared to the day before. How does that make any sense?
- Kids play up – who says they suddenly think peas are the devil’s work?
- 80% of 7 irons I hit are pretty decent, why change?
- Could the economic news be in the share price already?
A circuit breaker is the solution. Something between you and your reactionary behaviour.
TCFP are that thing – necessarily dispassionate and sloth like. We know the cost of fiddling, we exist to stop it happening. The biggest factor in long-term, real-life financial outcomes is not investment performance. They perform just fine. It is investor behaviour, humans do not perform just fine.
We are not here to get you more than the market has to offer. We are here to get you as much as it will easily cough up as possible.
That’s how we earn our fee – it may be boring but, boy, is it effective.