I spend so little time on my investments that it feels wrong. How can I expect to succeed without any effort?

You get back what you put in, right?

Wrong.

Investing is one of the most counter-intuitive of activities going, because we can only meaningfully judge the results over several decades, not the hours or days our human brains are wired for.

Just how counter-intuitive is it? In investing:

• You don’t succeed by trying harder.

• You don’t get what you pay for.

• Doing nothing is generally better than doing something.

• The herd usually gets fleeced as they stampede from gold to Russia to pig trotters in search of the jackpot.

As legendary investing strategist Charles D Ellis said:

The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed.

Don’t be a postscript to the next sad chapter.

Ignorance is bliss

Because I’m into investing, friends will often ask me what the FTSE 100 is doing or whether yak futures are hot or not.

Embarrassingly, I don’t know.

I just don’t worry about it, because knowing how many points the FTSE moved last week doesn’t help me achieve my goals.

If anything knowing that sort of stuff is counter-productive. It’s akin to being afraid to go out at night because you’ve watched too many episodes of Crimewatch.

Instead, my passive investing operation works like this:

Here’s how it fits together:

• The direct debit automatically deducts money from my account.

• My online broker silently funnels that cash into the funds I’ve preset as regular investments.

• The funds reinvest the dividends.

• My asset allocation already contains all the mutually supporting investments I need to grow my nest egg and hopefully weather any storms that come along.

It all ticks along famously without bothering me.

The passive investing revolution will not be televised

It takes me just 30 minutes a month to double-check that everything has gone according to plan between bank and broker. Nothing is ever amiss, but I’m a paranoid soul.

I also tune in every now and then to update my portfolio tracker. And I rebalance my holdings annually.

Rebalancing and reassessing my contributions once a year takes a few hours in total.

The rest of the time, I’m really not needed. It’s like a clockwork machine that just needs a bit of oil and a service now and then.

Sounds too easy? Well, we already know that passive investors will beat active investors on average.

If you think that you can pay someone to help you top the investment hi-score tables – and for some reason you think you need to top the tables to succeed (you don’t) – then there are plenty of people who are willing to charge you a massive fee for believing in fairy tales.

A crash course

The effort you need to put into investing is front-loaded. It’s worth understanding how the basics work at the start, so you don’t get ripped off or self-sabotage later.

Think of it like the time you put into buying a house. Doing some legwork is the best investment you can make in yourself because it’s incredibly important to make the right choice. Your future happiness depends upon it.

Here are some pointers.

• For the quickest summary of the basics, read William Bernstein’s If You Can. It’s 40 pages short and it is free on Kindle.

• For a fuller but amazingly easy to understand picture of what you need to do, read John Bogle’s Common Sense on Mutual Funds.

You’ll now understand why passive investing is the best way for you to go.

To turn that underlying philosophy into a concrete plan of action then UK investors just need to pick one book from the following:

• Investing Demystified by Lars Kroijer.

• Or Smarter Investing by Tim Hale.

Finally, if there’s anything you’re not sure about or want more practical help with, then not even modesty can prevent me from admitting that there’s no better place to go in the UK than our own passive investing HQ.

Get rich slowly

That’s it. Read two books – one easy, the second more comprehensive – then reinforce your understanding with our series of key passive investing posts.

You’ll be better informed than the vast majority of investors out there. You should easily know enough to manage your own investments with minimal impact on your time ¹.

There’s always more to learn, of course, especially for investing nerds like yours truly.

But if you haven’t got the time or the interest then at least you can move on in the knowledge that once you’re set up, the hard work is already done.

Whatever you do, just don’t end up writing a blog about it.

Take it steady,

The Accumulator

1. Note you may need professional assistance if you’re trying to do something fancy, to do with taxes for example. If you need financial advice, look for a flat fee adviser with a good reputation who charges by the hour.[↩]

Good reads from around the Web.

I don’t easily back down in what I’ll pompously call ‘intellectual debates’ (which I have all the time with everyone, to everyone’s annoyance).

But I will change my mind, if persuaded.

For example I was far more left-wing at University – having been “to the right of Genghis Khan” as a schoolboy, as my dad once quipped.

Today I’m pretty centrist (though libertarian if not an outright anarchist on personal freedoms and so on).

Traveling from Left to Right with age is not an unusual journey, but I do think it demonstrates the flexibility to change my mind.

Being wrong the right way

This is relevant to our discussions here, because if I was to pick one thing that’s most changed my active investing after more than a decade at the coal face, it’s probably that I’ve cultivated an ability to more quickly decide I’m wrong.

And then to sell, sell, sell.

This is not as easy as it sounds.

As the on-point Morgan Housel recently noted in a Motley Fool article:

One of the hardest parts of investing is finding the balance between:

• Riding out periods temporarily unfavorable to your views.

• Realizing your views are wrong and moving on.

It’s the difference between patience and stubbornness, and can separate the ruined from the rich.

Sell your lagging value shares too readily, and you’ll cultivate a Buy High, Sell Low strategy that’s bound to end in tears.

Or on the growth investing angle, be to quick to dump winners because you now see they’re possibly overvalued, and you’ll probably never enjoy big gains from the handful of hot shares that generate most returns in bull markets.

Obvious corollary alert: This challenge is exactly why most people will be best off not trying to pick stocks or to time markets, and to invest passively instead.

(Maybe me too! Time will tell.)

One career ruining call

For instance, Barry Ritholz reminded us this week at Bloomberg about the fall of the once-famed market timer Joseph Granville.

Granville moved markets. He made millions of dollars a year from his newsletter business, and when he urged his subscribers to sell everything on 7 January 1981 he apparently sent the US Dow index down 2.4%, on then-record volume.

What power!

Sadly, though, he was wrong. In fact America was just on the cusp of its greatest ever bull market.

Worse was his inflexibility. Ritholz notes that:

Granville, who died in 2013, never managed to admit his error or reverse himself; he ended up being consigned to the dustbin of history, his track record in tatters.

Mark Hulbert, who tracks the performance of investment newsletters, noted in 2005 that Granville’s letter was at the bottom of the “rankings for performance over the past 25 years – having produced average losses of more than 20% per year on an annualized basis.”

To be an active investor, you need to take a different view from the market. It demands a certain arrogance to take a contrary view to the world’s best guess.

But to believe the world is wrong and you are right for three decades! That’s hubris on a par with the great Greek myths.

Certainly, admitting you are wrong can get harder with time. But it’s doable.

It took me about a decade to finally concede I was wrong not to buy a London flat in 2004, for instance. (And who knows, perhaps in 2025 I’ll see I am wrong not to buy one now…)

Staying humble and reminding yourself daily of your limits is I think essential – whether you’re an active investor, or a sensible passive investor whose strategy is built from day one on understanding the difficulties of all this decision making.

Foxy forecasting

We might ask why we find it so hard to intelligently prevaricate?

I suspect it’s to do with incentives.

In investing – and in much of the rest of life – people prefer you to be bold and wrong than to be undecided.

As a result, you’ll hear an active fund manager say “I don’t know” about as often as you’ll hear them say: “Yes, let’s see what we can do about the fees on that.”

As John Kay wrote this week:

In Expert Political Judgment, Philip Tetlock demonstrated to little surprise that forecasters were not very good.

More surprising was his identification of the characteristics of good and bad forecasters.

Tetlock employs a distinction, credited to the Greek poet, Archilochus, but popularised by the philosopher, Isaiah Berlin, between hedgehogs and foxes.

Hedgehogs know one big thing; they have an all-encompassing world view and discover facts that confirm what they already know to be true. Foxes know many little things; they are eclectic in their sources of information and nuanced in their judgments.

Hedgehogs command more public attention but foxes make better forecasters.

Harry Truman, the former US president, (perhaps apocryphally) sought a one-handed economist who would not say “on the one hand” and “on the other”.

The two-handed approach corresponds to the reality of most complex issues. Yet modern business people, politicians and media seek the Truman type and find it in hedgehogs.

To grab attention and build a reputation, it is more important to be unequivocal than to be right.

[continue reading…]

This is a bit of a meandering and personal rant. Feel free to skip it!

A new year, a wobbly stock market, and naturally a young not-so-young investor’s thoughts turn towards topping up his SIPP.

And as I pondered how big a lump sum to shock and awe the boys down at Hargreaves Lansdown with, two factors came to mind:

• From April, dividends will be taxed more heavily.

• Pensions are going to be revised again in the March Budget, too, and it’s unlikely that Monevator readers’ many sensible suggestions will be in the driving seat.

I’ve been self-employed for most of my working life, but I’ve only been set up as a Limited Company for about a third of it.

And to be honest, my earnings have only really been big enough to make much difference how I paid myself for the last four or five years.

(Before then I was mostly on borderline artist-in-a-garret rates, at least compared to my conventional London friends).

Now if I do nothing from April, the new dividend tax rates mean my tax bill will be around £2,000 higher than it would have been under the old system – thanks to a 6% rise in my effective tax rate.

We debated whether this was fair when the change came in, so let’s put that to one side.

What interests me now is how I find myself responding.

Fund-a-mentally

I’ll say right away that I’m not a very money motivated person.

That might strike you as an insane comment to make, given that I run a personal finance website and spend half my days clucking over my ever-growing nest egg.

But it’s sort of true.

I’ve never followed any line of work for the pay check, really (as my employers from my 20s would no doubt gleefully confirm).

And I don’t spend much money, either.

In fact I probably look like a bit of disaster to some of my peers.

What matters to me is freedom to do what I like – or more accurately to avoid doing what I don’t like.

That’s why I am self-employed, and why I far prefer to work from home.

It’s also my motivation for investing: I find everything about conventional work suffocating.

I don’t want a freedom fund or even a f***-you fund.

It’s more like a survival fund for me.

You’re having a half!

Given my ambivalence towards slaving away for mere money, taxation is a vexing issue.

Without wanting to get political (my post-Thatcher reflections were a better place for that, or even – contrarily – my lament about income inequality) I’m happy paying roughly 20% or so in income taxes.

And I guess I can live with 25-30%.

Any more tax than that and I strongly suspect I’m just supporting other people’s lifestyle choices, rather than the essentials of State and a worthwhile safety net.

Unfortunately, add together corporation tax and the new dividend tax and I will be paying an effective 46% tax rate ¹ on any income over £43,000 or so – and in reality I’ll be paying it well before then, given my portfolio still has unsheltered savings, bonds, and equities outside of my ISAs and SIPP, where any cash returned will register as income.

Now £43,000 might strike some of you as a lot of income, depending on how and where you live.

But trust me it’s very mediocre among my peers in London.

Yet striving to boost my income – only to hand over almost half of the extra to the Government?

I find the thought pretty demotivating.

Confused future pensioner

One obvious solution is to direct all the would-be higher-rated income into my SIPP instead.

As I say, I’m not in the mega-earner category or anything like it. So this could effectively shelter (or at least postpone) a good swathe of my income from the new dividend tax meat cleaver.

But sadly, that’s where those upcoming pension changes start to worry me.

Could George Osborne bring in new restrictions, or even retrospective measures?

It wouldn’t surprise me at all.

Friday’s off – tax-free

I have plenty of other thoughts swirling around about all this.

For example, it makes clear yet again how much better it would be to own my own home from a tax perspective.

While I desperately try to grow my investment portfolio as tax-efficiently as I can and to keep manageable the tax take on my income that after all has to pay the rent, my friends who own their own places see their (lottery winning) tax-free capital gains roll up year after year after year.

Of course they’re not paying tax on the imputed rent element of their home equity, either.

And then they bewilderingly declare that their £750,000-£1 million property is not a financial asset, just to further annoy me.

Home ownership in this country really is the killer tax break that keeps giving.

But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”, that’s for another day. ²

No, I’m thinking I should simply forget about earning more money.

Instead I could keep my lifestyle costs low and pay myself with free time.

Yes it will delay financial independence by a few years.

But given the upcoming tax whack and the unsheltered assets I’m already struggling to tuck away into ISAs each year, not by so much as it might.

And best of all?

They don’t tax free time.

(Yet.)

Note: Thoughtful responses about how you personally address these conundrums very welcome, but ad hominem attacks declaring that since I earn more than you or your cousin Nigel I should be happy I don’t pay 80% tax rates will probably be deleted.

1. Note: 46%, NOT 52.5%. The combined corporation tax and income tax rate for a higher rate tax payer is 20% corporation tax plus (80% of 32.5%) on the dividend, which equals 46%.[↩]
2. Or another country. Or another part of the country. Either would help deal with the income issue, too, in that I’d almost certainly have to earn less.[↩]