Many everyday investors buy their first share on a tip from a friend – or from the Government, via privatisations like we saw with the Royal Mail.
Some go on to make stock picking their hobby or even their passion, while others begin to invest in active funds.
Increasingly, index trackers and passive investing mark the final stage of this evolution, as people learn more about the high costs of managed funds and how hard it is to beat the market.
Ever contrary, I’ve done the opposite.
When I began putting my cash savings into equities more than a decade ago, I mostly used tracker funds.
Despite having been fascinated by both business and shares for years before that, I’d done my research and I knew that index tracking was the surest route to growing my wealth through the stock market.
However as the investing years rolled by, I strayed – or succumbed to the Dark Side, as my co-blogger The Accumulator put it when we debated our different approaches a few years ago.
And I entirely agreed.
After all, I knew what I was getting into. That was one reason I was so pleased when The Accumulator signed up to share his burgeoning passive investing knowledge with Monevator readers.
I wanted Monevator to continue to make the case that passive investing was the best route for most people, because I absolutely believe that’s true.
However I no longer considered myself the best person to make that case. I’d wandered off the map to a place marked Here Be Dragons.
As tears go by
For most of my nearly 15 years of investing I have traded very rarely and could easily ignore my portfolio for weeks or months at a time – even after I’d begun investing in individual companies and small caps.
Now, after the past three years (the point of this post, which honestly I’m getting to) even I find that hard to believe, but I only need to look back in my investment log to see that it’s true.
Below is a typically sparkling entry I made one day alongside the numbers I copied across from my various broker accounts, which I only ever did on particularly rainy days:
Uh oh, haven’t checked this for ages – thought I had!
This is going to be ugly.
FTSE is at 3,500.
Bottom has fallen out of HSBC, and so on.
Such deep insights: George Soros and his Alchemy of Finance
The date of that entry was 9 March 2009 – virtually the bottom of the financial crisis in the UK, a rout that had cost me many years of savings – and yet my previous entry had been back in October 2008.
What on earth was I doing that was so much more exciting in-between? Partying with models and rock stars? (Hey, I can’t remember, so it must have been a great party.)
More likely I was reading The Snowball
I was certainly following the bear market – I have dozens of blog posts to prove it – but I just didn’t seem to be that fussed about the short-term movement of my own portfolio in those days.
Fast-forward a few years though, and it’s quite possible that I knew the value of my portfolio on an hourly basis for some days in March 2015 – and certainly on any violent days like we’ve seen in the first couple of months of 2016.
So what changed?
Fallen angel
Well, on a practical level I unitized my portfolio in 2012, and that weaponized the portfolio check-up process.
I’d hitherto made a deliberate point of not tracking my returns too closely because I felt doing so was likely detrimental to my returns (I still suspect it is) and to my mental health (I’m now doubly sure of that).
But back in 2012 I decided I needed to find out once and for all how much value – if any – my trying to be clever with shares was delivering.
I had hunches, ballpark guesses, and I’d done some back of a napkin maths. But I didn’t know for sure, and that no longer seemed like good enough.
I mean, I’d been blogging about investing for five or six years by that point, and while Monevator has always had a passive focus, especially in the earlier days I’d often shared my active opinions too.
So I felt like I needed to know more about the investor who was giving all those opinions (i.e. me!)
Moreover investing had begun to seep into my professional life.
So from the end of 2012 I started to track my returns via a largely automatically updated and unitized spreadsheet1 in order to see exactly how my investments were performing, without any distortion from savings or withdrawals.
The initial idea was just to continue to copy the most relevant figures over to that racy investment log I mentioned whenever I felt like it.
But two things happened:
1. Now I could see my portfolio live at any time – and pretty much see my net wealth at the same time, given I invariably have between 75-95% of all my worldly assets in the market – I couldn’t resist following it more closely. My data was now just a click away, whereas before I’d had to log into several broker accounts to tot up various numbers to see where I stood.
2. I got to know a couple of people in the finance industry who suggested that as I was so clearly obsessed with investing, why wasn’t I interested in running a fund and earning mega-bucks? (Especially as some of the people they knew who did so hated it…)
The answer to that question is long and even more self-indulgent than this post, so let’s leave it for another day. (Here’s a taster).
However I did decide to follow some of their advice and to dutifully archive my returns on a daily basis, as well as recording all costs and so forth (which I was already doing via my unitised spreadsheet).
My blueberry nights
The idea was to create a three-year performance record, which is the minimum period for these types to get interested.
There was some talk too of recording and/or calculating daily volatility, Sharpe ratios, maximum drawdowns2 and all the rest of it, and even of trying to hedge out market exposure via a spreadbet or similar to create a sort of DIY long/short fund that might help highlight any alpha-generation capabilities I had – or “edge” as the hedge fund guys put it.
Well I’ll save you the suspense. Within 12 months I was bored or forgetful of recording daily snapshots, and worse I believed it was starting to affect my peace of mind (more on this anon).
So I never bothered calculating all that gubbins the typical fund manager’s platform automatically spits out for him or her alongside their profit or loss line at the end of every day.
However I did continue to track everything else, and I downloaded the returns of my portfolio and my various positions every week.
I also continued to record all money in and out through my unitised spreadsheet as part of this, and documented my buys, sells, costs, and so on.
Ashes of time
I kick-started my uber-record keeping from January 2013, and it continues in a slightly toned down format today. (Everything is still unitised and I record monthly snapshots, but starting this year I’ve stopped recording weekly snapshots.)
So what have I got for my pains?
Well, for one thing I now have an industry standard three-year performance record that I can compare with any commercial fund’s returns to see how I measure up over that time frame, rather than guessing and potentially deluding myself.
I’m probably going to share this with you next week – not to try to persuade anyone that it’s a good or a bad idea to invest actively, but rather because I think I’d find it interesting if I was a Monevator reader.
Also, I’d like to put all this data I’ve hoarded away to some practical use!
In addition I’ve learned some interesting things about the difference between being an investor and a trader, and also how hard it is to unpick where edge does (or doesn’t) come from.
Most importantly I’ve discovered how much more stressful investing is when you really care about the short-term – when you know someone other than yourself might see your results – and as a consequence you can find yourself living with the market’s volatility from minute-to-minute.
If I’m honest it has probably affected my mental well-being and my lifestyle, and I don’t think for the better. More on that in a future post, too.
The grandmaster
I’ll end this first part with a quote from Winston Churchill that I think is very relevant to this experiment I’ve been running, and to the changes that came with it:
“We shape our buildings and afterwards our buildings shape us.”
Being able to easily see exactly where all my positions are at any time has changed how I think about those positions.
And knowing that someone might um and ah over the monthly (or even daily) ups and downs has reduced my tolerance for that volatility.
Whereas once I would go months without getting up-to-date return figures from my investments, I rarely go 24 hours these days.
Perhaps there were different responses I could have made to all these new stress points, but the one I found myself employing was to greatly increase my trading activity to try to dampen down the extremes.
Costs exploded. And I slept less well at night.
In the next part I’ll share my returns over the past three years, and in the final post I’ll reflect on what I’ve learned the hard way as I’ve increasingly explored trading versus investing. Subscribe to get these future posts via email.
Hi,
If I understood you correctly, you are making an observation that in the same way you really have to understand your appetite for risk as an investor, you also have to understand your anxiety tolerance? So seeing as human psychology is so important in investing & your fundamental character is hard to change, you have to adapt a style that is in harmony with your tolerances.
Being higher on the anxiety spectrum than I would like, I deal with it by using passive funds for the bulk of my investments, which I can ignore. [except for an annual check to see that there are no problems]
But then for the spice in life, I decide on what % I can cope with losing & actively ‘play’ with that in riskier investments – this experimentation serves several purposes. Education in understanding new investment types & tools, the potential to discover diversification options, satisfaction of curiousity …..& something safe to fiddle with when you feel you have to do something, yet know the best thing is to do nothing & hold your nerve until the storm passes. [Ironically that can be harder]
Playing with virtual tools to see how the moves you made would have worked out [like chess] is definitely smarter, but doesn’t satisfy for me because it feels unreal with no skin in the game – even though I know the lessons learned are equally valid. People can be so complex…..
Looking forward to the rest of this tale. Hope you are sleeping better now.
(he says, posting at 2am.. tsk tsk)
A very interesting post and one that resonates with my thoughts on the active/pasive debate. We are human and doing things the boring and logical way is hard to do. It requires a lot of patience or perhaps ignorance so we succumb to temptation and start dabbling and then get hooked on the whole investing/trading process. I now see investing as a hobby and having an interest means iIam informed, I dabble a small amount in a portfolio but it is restricted; I have learnt that being boring has its benefits but to just do that doesn’t provide me with enough investing sustenance. The path taken doing things is a journey and often what we learn about ourselves is the most interesting thing. I look forward to the later posts.
Love this post 🙂 You’ve been hard on yourself unitising every week. Every year in January is good enough for me.
There’s an edgier version of that Churchill quote, from Nietzsche
Sort of like Heisenberg’s uncertainty principle for mental thought processes, the observed will change the observer.
Thanks, very interesting post. One issue I find with tracking your own returns is the question of which date to calculate annual and YTD figures from. Is there an industry standard? I’ve seen different websites use 31 Dec, 1 Jan and the close [?!] of the first trading day of the year as the figure to calculate YTD and annual return figures from [i.e. difference between the value on that day and the end of the year]. Obviously the underlying figures can change in that time. Is there a convention? What do other people use?
I am really looking forward to the third part… it’s always the behavioural aspects I find most interesting about investing – quite looking forward to what Neverland will have to say next also Every great site has to have it’s troll :).
Interestingly, I tend to look at my portfolio when I am bored, and I often say to myself I wonder what caused the shift in sentiment which led to my numbers going down or up.
@Survivor — Yes, something like that. I suppose I am not really making a point with this series, so much as sharing my experiences and bringing longer-time readers up-to-date with my investing. People often ask how I did over some particular year or whatnot, and I never really answer because I don’t see my returns as primarily (or even secondarily!) the focus of this blog. But I thought sharing a bit more was overdue. I think the best place for discussion is probably the final post in the series; in retrospect I probably should have kept comments switched off until then. 🙂 I agree with all your comments about passive investing and peace of mind.
@pinkney — Cheers. I agree, in general if I have an urge I want to scratch it. To err is human and all that. But of course we can and usually must work against that, too, with strategies, or else know we’re perhaps going astray.
@JohnG — I deleted your reply and one I made to him too, as in retrospect it was just going to spoil my day and this discussion. 🙂 Cheers for making the point though.
@Learner — Well, I haven’t really dialed back though I’d planned to, so… (Not sleeping is to some extent a metaphor, mind).
@ermine — Cheers! Well as you know you need to unitize whenever new money enters or leaves the portfolio, which is at least monthly for me but ad hoc in-between. But as I buried in the waffle of the post, I was actually recording DAILY returns for about a year. At least I’ve stepped back from that particular brink. 🙂
@Grand — Sorry, deleted him, can’t be bothered to feed the troll today. Re: Fluctuations and sentiment, remember that saying it is hard/impossible to unpick skill / movements from random noise is different from saying it’s hard/impossible to profit from it. Very often the market does move for some reason, and the more time I’ve spent in the trader’s den, the more I’ve come to realize this. (It’s in fact been one of the revelations — or self delusions, some would prefer) of this whole experience. However that’s different from saying an active investor can consistently *profit* from such fluctuations. Clearly from all the evidence we’ve seen they can’t, probably because most genuinely market moving stuff, however trivial, is unpredictable. But enough spoilers for now! 🙂
@Grand, sorry, meant to add to your point though check out this graph from Morgan Housel showing how wild the sentiment swings are around the relatively uneventful earnings line over the long-term. Of course the author may be overdoing the point with graph scales and so on, but still!
https://twitter.com/TMFHousel/status/702512324280766465
Sorry not really related to the article, but I just started my journey in investing and wanted to say how much I love and appreciate the work you do with this site. I’m a Brit living in Asia, so it’s taken me a while to work out how to get things set up, but I’ve finally opened a brokerage and bought my first ETF’s this week. Just when I thought the site couldn’t get any better you go and make a post with a load of Wong Kar Wai references!
Thx for sharing your evolution with us. I am curious to see where you end up. It is reassuring to see we all have our periods of doubt, the need to be active in the market, do follow up and periods that we do not care at all.
My personal goals is to look only once a month to my core index portfolio. Not more. I know I will not beat the reference index, but most likely I will beat the average investor (We all know the pro and cons of indexing) I do not try to calculate my returns or anything else. I just compare against my FI plan. I do log every month the amount invested and the market value. Maybe one day, I will make a graph. Boring? yes. Efficient? hopefully!
Yet, I have the need to trade, to be better than the rest. That is why I have a play money portfolio. Here I time the market, play with options,… As I like to sleep at night, I keep this small compared to my core portfolio.
Would that be the best of both worlds?
Interesting post.
I’ve rather moved in the opposite direction to yourself. Actively traded and invested for nigh on 20 years, learning much along the way – the majority of my balance sheet was accumulated in this endeavour so a I really did learn something along the way. But I also learned the toll this took – exactly the things you refer to when you become wedded to the market by a desire to micromanage one’s P&L on a weekly (daily!) basis.
Once I realised I no longer needed the returns I’d been making – as much if not more to living sensibly and enjoying life’s simple pleasures as to possessing vast cellars of treasure – I took a step back (rather, several steps), choosing to keep the market at a distance, relinquishing the control, strategising instead of tactically responding, and I can tell you, life is very good once again. I commend this serenity to the house.
Interesting how changing investing habits can take us on a journey that tells us a lot about ourselves.
I’m a fire-and-forget type of investor because I’m in the accumulation-of-wealth phase. In early retirement, I suspect things will be different, who knows…
I must start by thanking you for this excellent website. Your style is very welcoming and approachable and I’ve learned a lot from your posts over the years. I’m early retired now and all my income is from investments. The thing that stops me getting jittery about market moves is the cash buffer I maintain for living expenses. I aim to maintain a full two years of living expenses in cash and top up the pot with dividends as they come in. I’m only one year in to this financial independence experiment but so far so good.
Oh you tease…eagerly awaiting the next post!
I’ve found google sheets a real boon for tracking. It will draw live data into a spreadsheet so I can see if any of three portfolios step out of line and need a trade.
I check more often than one might normally expect to do with a passive set-up and find myself perhaps taking the odd position or two, but I know deep down that I should trust the rules I set myself
One advantage of regular checking is that you gain a greater understanding of what is going on – even if you decide not to trade. (Also a great advantage of reading and engaging with this site!) For example a comparison of VUSA to SPY reveals a lot about why home bias is painful.
I track quaterly snapshots and report against progress – I cannot be bothered with unitisation and am a big fan of not tracking accurate returns. I need to know where I am and where I think I’m going not how I got here (although I like to know if I’m heading towards a better place!)
I admire your dedication/obsession, though TI. I sold gold this week.
Hi All
Very interesting post and replies
I started investing in1999 as retirement approached
Active trading-investment trusts-made money-a rising market!
Read and read and updated portfolio every day
Stressful and then I discovered John Bogleheads,Vanguard and index tracker funds.
Moved slowly over -all tracker now-still update every few days.
Always used Quicken and a replicated portfolio with iii(for updated prices)
Total Worth continues to rise-still learning and reading-do very little trading-realising assets cos retired 13 years now
Much more relaxed-rode out a few bear markets/slumps now -able to concentrate on other things-got a life
But nothing is more fascinating than learning how money works
xxd09
Your path sounds very different from my own, happily sold on the merits of passive investing, but very much looking forward to hearing about your journey 🙂
I’m proud to be pretty much a passive investor these days, but I’d admit to checking my portfolio on at least a weekly basis and noting the value at the end of each month. I only check daily when the markets are going like a train – when they are in reverse, I find I don’t want to check quite as much! But the biggest and hardest thing I’ve found is having to cash some of my funds in to cover expenses in “early retirement”, regardless of which way the market is going. I know “deaccumulation” is a necessary phase and should actually be rewarding and enjoyable. But it isn’t!
@JimMcG — That sort of sentiment is exactly how I imagine I’d feel, and why I intend to try to live off the income alone when I achieve financial independence, and to leave the capital alone.
My co-blogger TA disagrees about this stance, and I understand the logic and that it’s not going to be possible for most people. But I think for formerly driven investing-orientated chasers after early retirement or FI, “selling the seed corn” is particularly emotionally difficult, and potentially if you retire early more risky…
Thank you for the inforgraphic. As I said looking forward to part 3 and for the next market correction.
😀
@JimMcG @TheInvestor – it does seem to be a difficult transition. You spend all that time and pain accumulating – and then you want to spend it!? I am trying to reach the point where income will cover most expenditure (courtesy of some good old-fashioned defined benefits pensions), and then at least I know I can make choices with the capital.
But the psychology does seem bizarre. I have things I have wanted to do for a long time, but have been too cash poor, or more likely too time poor, to commit to. In a while I will have the time and the cash (my hobby tastes are not that extreme) to indulge, and yet I worry about indulging.
So remind me; what was I accumulating the money for exactly?
I don’t rely on the natural yield alone – mine is low because I’ve plenty of low yielding assets – and manage the deccumulation question via two cushions: cash cuffer (18 month’s living expenses) & reserves (3 year’s living expenses).
The natural yield funds 1/3 to 1/2 of the living expenses; the other 2/3 to 1/2 arising from asset sales. The total withdrawal rate (natural yield + asset sales) is around 3%, so sustainability should be good.
The cash cuffer provides some scope for timing asset sales, and sales can be used to rebalance back to targets (modestly top-slicing the best performers, NOT selling out of favour ones). Since only 1-2% of assets are being sold, “seed corn” is not being rapidly consumed.
In the event of continued low asset prices (market depression):
1. Living expenses can be reigned in;
2. Reserves can be drawn upon to either:
(i) fund living expenses until asset prices recover (buffer + reserves = 5 year’s expenses, so that’s a very lengthy market slump), or
(ii) buy deep-value assets as a mean reversion trade (5 year+ horizon), after which they can be sold and converted back to reserves.
The buffer & reserves approach involves deferring gratification, since they reduce the pot of investment assets and thus income, in favour of safety: reducing the sequencing risk of encountering a string of poor returns in the nearer future by enabling the investment assets to remain untouched and do their job over the longer time horizons they were selected for.
@ Toby Mory – whats the distinction between cash buffer and reserves? Is reserves not cash? Some other asset perhaps?
I prefer your idea of considering yield and growth as a total return to live off as well, rather than just yield, because:
a) it seems more rational, less psychological
b) you can accumulate less before becoming FI
c) you can utilise CGT allowances into your running costs
@Rhino, the distinction is part mental accounting, part liquidity and part asset class: cash buffer is instant access cash; reserves candidates are ladders of term accounts, index linked savings & linkers – so all cash/cash-like.
Not trying to convince anyone just describing what works for me, which is the important thing.
@Toby Mory – cheers for the reply on the reserve/buffer, all clear now
Theres a lot to be said for a chunky buffer. I’m also operating on a ~5year cash/cash-like float. Well worth the opportunity cost IMHO.
@Rhino – As there is no rational distinction between capital and dividends (it’s all capital) a total return approach is fine if one is comfortable with an element of market timing. Personally I prefer to collect rather than reinvest dividends in retirement as a risk reducing strategy. Dividends reinvested are subject to market risk. The value of the dividend could be wiped out by a fall in the share price. The risk with a total return approach is therefore that I become a forced seller at that low price just when I need to raise cash for living expenses. Equally, there is always a potential opportunity cost from not reinvesting the dividend so I think both approaches have merits.
@THE INVESTOR – No offence taken, I can fully understand why you didn’t want to engage given past experience!
If I may ask the question, and apologies if you feel you gave sufficient detail in the post, what is your motivation for your active investing? It very much sounds from your post that the process of watching your active investments and validating your choices hasn’t been overly enjoyable. Why go through that, if you believe that passive investing is a good option?
A counter-point to the avoiding selling capital argument is that if you can afford to not do it then you’ve either saved well in excess of your requirement or are spending well below the level you can afford. That may be fine if you’ve loved all your time working, what you’re doing, and can’t envisage anything you’d have liked to use the money for, but that seems like a rather niche position.
Excellent post. Thank you. It resonates strongly with me not least because I too started rigorously tracking my activities in January 2013.
I wonder though whether you are doing Sharpe Ratios a disservice? The moment you try to publicise your results, people will do comparisons. And comparisons without Sharpe Ratios are meaningless, no?
I monitor all my portfolios using a google spreadsheet.
That gets copied to a csv file on the same day every month & the headline figures are pasted into a long term spreadsheet, the current incarnation of which goes back 9 years.
As for calculating my actual returns, well I do that about every 5 years, which is probably much too short term in outlook.
The only reason I check stock prices is to see what could be added to or deleted from the portfolio. I sleep very well at night.
Hmm, I’ve just realized that nobody identified that all my sub-headings were titles of movies by Hong Kong movie director Wong Kar-wai.
Wong Kar-wai shot Days of Being Wild, which I loved in the 1990s.
So if you were wondering why all the weird sub-headings — that’s why!