The behavioural finance gurus tell us we’re a bunch of weak-willed monkey brains who chase performance like the world’s tastiest banana. However much we may think we’re rational agents – weighing up the odds like ice-cool Vulcans – the reality is we’re more like excitable apes, swinging from mood to mood like our ancestors swung from branch to branch.
At least that’s how I see myself.
How else to explain my desire to hoard gold or to get into whatever else is soaring RIGHT NOW?
Or the unrelenting inner critic that awards me a ‘Fail’ for missing the massive Bitcoin run-up of the past two years? Never mind the all-you-can-eat buffet of risks that could render BTC worthless at a stroke.
It’s tough to ignore the lure of recent success and the desire to do something (anything!)
Even when the evidence suggests that the more we trade, the worse we do.
A voyage of self-discovery
Undertaking and (mostly) sticking to a passive investing strategy is vow-of-chastity hard. Like being a monk who renounces worldly pleasures while living in Las Vegas.
As with our shaven-headed role model, we’re embarking on a journey of self-improvement. Perhaps not escaping the shackles of the mind, but at least the handcuffs of the office. Golden or otherwise.
I employed passive investing to achieve financial independence (FI).
The journey felt like piloting an ocean-going escape raft – lashed together from index trackers and propelled by my savings towards the land of freedom.
The FI adventure demands:
The determination to stay the course no matter how turbulent the seas. You may be adrift or lost or seemingly sinking, but you cast aside doubt – the mental image of FI island and an “aloha” greeting keeping you going.
The discipline to stick with the plan. Save, buy, hold, rebalance. This is the drumbeat that rows your boat across the uncertain ocean. It’s dull. Your mind screams for an end to the monotony. Willpower must be the galley master to instinct.
The fortitude to resist the siren song of instant gratification. This is particularly true if you’re living on restricted rations. It would be so easy to beach yourself on some sandy reef. Break out the rum, party with the natives, and ignore that smoking caldera and the giant pot that everyone’s so excited about. Hot tub anyone?
The resolve of self-reliance. You increasingly realise that you can fix, patch, or workaround any problems that you face. The comforts and status symbols of your old life fade in significance. You find new pleasure in simple things and in a grander narrative of discovery.
I salute you
It’s a lonely journey at times. It’s not something that many other people want to talk about. So it’s hard to get positive reinforcement that you’re doing the right thing – except through communities like the one here at Monevator.
And that’s what I want to acknowledge. Whether you’re a young 20-year-old who’s making an early start, a 30-something who’s throwing everything at it, or a weather-beaten sexagenarian about to make landfall – you’re doing something extremely difficult.
You’re building or have built large reserves of willpower. You’re forging good habits that are transferable to other parts of your life, like work and health.
And you’re doing it in the face of the general scepticism, ignorance, and sometimes the dismay of wider society.
But if you can maintain your course even when it’s a slog – if you refuse to give up and you fight off the FI demons – if you keep going no matter what, then you will get there.
I promise you, it’s worth it. This one really is about the destination and not the journey:
- Waking up when you want to beats an alarm buzzing at unholy o’clock.
- Hanging out with friends and loved ones beats spending all day with colleagues and, to be fair to them, the knob-heads who plague work life.
- Days in the sun, reading, exercising, messing about, and pouring time into passion projects beats office-politics, KPIs, pitches, fire-fighting, and 360 reviews.
Oh my God, it’s better. It’s not perfect. Real life still intrudes. But FI is worth waiting for and passive investing can get you there.
Take it steady,
The Accumulator
And now we have a “price war” in the world of trackers! For instance, the new Class P Shares in the Fidelity Index UK Fund (FT-SE All-Share) can now be bought for just 7bps (that’s 0.07% per annum), BlackRock iShares Core S&P 500 UCITS ETF for 0.07%, Fidelity Emerging Markets for 0.23% BlackRock iShares EURO STOXX 50 UCITS ETF for 0.10%, etc.
Will Vanguard, Deutsche Bank, Lyxor, SPDR, HSBC and L&G respond?
Or, do these fund sponsors hint at something else? Like the market being “toppy”?
Of course, these funds are driven by weighted market capitalisation (you have most money in HSBC then downwards, for example). I have a professional problem with that in that I emphasise that equities are for income generation first, capital preservation with reference to inflation second. So, oftentimes, I recommend so-called “fundamental” trackers, like the wonderful VT Maven Smart Dividend UK Fund or the Lyxor SG Global Quality Income ETF. These cost a little more (0.50% and 0.45%) but offer the tempting prospect of a decent yield and robust methodology.
Then we have the “family office” investment trusts, such as Caledonia Investments, Hansa Trust and RIT Capital Partners; well worth a look.
Back to trackers – the fees can’t go any lower, can they?
I am an IFA based in Somerset, said in the interests of full disclosure.
Really?
I think its pretty easy actually…I mean its not you are going to get stoned by an angry mob, shot at or anything is it…
Mental toughness is getting up at 5 am every day to go fetch water a couple of kilometers away to farm your scrap of barely arable land
@Neverland — That’s poverty, not mental toughness. I wouldn’t ever compare our modest hardships to theirs but on the specific subject of mental well being there’s plenty of evidence the West is in a worse place.
@Investor
I think thats a matter of expectations being unrealistic in the West
Wise words – and less extreme than Mr Money Moustache (much as I admire him)
Curious what you use to produce those great diagrams?
Well, self awareness and discipline are helpful in investing as in most of life’s endeavours.
But I would caution against too much self congratulation. Its a hell of a lot easier to save money if one has plenty of it. Of course, its easy to spend it too, but there is definitely a difference between having a surplus and not.
I would just like to say that today marks the 1st anniversary of my foray into the world of investing. It’s been a roller coaster ride. I personally want to thank all of you have contributed in some way of the year and on posts before I washed up on the Monevator shores.
Rebalancing time?
Grand
I’m personally the 30-something trying to play catch-up on this investing game and trying to throw as much as I can into this financial independence game! If somebody had told me 10 years ago that I would be happily investing in the stock market, I would have told them they were crazy as I would never put my money into that madness! Turns out that madness can be quite addictive!
While being incredibly compelling, investing for the long run can get a bit boring at times. My usual way to ‘tough it out’ is to fiddle around with my investing/budget/net worth spreadsheets….then catch myself fiddling and tell myself to stop and go make some more money from somewhere!
Another 30 something trying to catch up here. Having followed the advice on here, Boggleheads et al. I have managed to achieve a reasonable return during my first 18 months of investing. I have yet to see a market downturn and as such not had chance to have my nerve tested in my short investing career. Just hope that I will follow the courage of my convictions when the time comes!
my biggest fear is ive joined the party too late! just turned 49 yrs old and just started investing my savings seriously. fortunately I did have savings to invest, missed out on all the past 5 years so to miss FF- your doing great.
as for monevators article today I think hes bang on!
saving does take discipline, not everyone is willing to do it, most people are spend it all now and worry about the future later or the state will keep me but we are responsible independent people and any financial freedom later we generate, we will deserve every penny of it.
I’m 34 now, and I started my passive investing portfolio in Jan 2013, after trying unsuccessfully to trade individual stocks. I’m quite lucky to discover indexing only 6 months after I started trading stocks, and my monetary lost were minimal, I’ve only lost $3,000 on my Apple stocks when it plummeted from >$700 down to $400. Lesson well learned.
When I travel abroad, I can relax and forget my portfolio, and that’s the biggest advantage over sitting in front of my computer, vexed that stock prices are jumping up and down in random. Just being at ease with my portfolio of ETF’s is my biggest joy.
30 Something isn’t too late, it problems the best time to start because reality bites and we start to realise time is running out. In my twenties I was too cocky and thought I’d land some cool job which would solve everything. But 30 is when I realised: start now or you’ll end up depending on whatever state pension there is when your 60.
We’ve just opened loss-leader current accounts that pay 4%p.a. after tax: that’s 1.5%p.a. above the RPI inflation rate. Not bad for a low-risk “investment”. Our money source was maturing fixed rate Cash ISAs.
But over the next two years more of our ISAs will mature, and we shall probably have exhausted this stunt. What then? Will we feel harried into investing more into equities than we really want to? I almost envy younger people who are saving every month – if equities collapse they can rub their hands and enjoy buying more at the new, lower prices. But what if you are codgers who want to preserve capital? The Harry Browne Permanent Portfolio or its competitors: is that the way to go?
Loved the post. Any investing, passive or active is about recognizing, not necessarily overcoming the biases we’re ALL susceptible to. It took me a few years to realize how my urge to buy was strongest on days where the tickers showed green and it took some practice to “feel” the other way, that is to buy when the markets bleed red. Now, it’s when markets fall that I crack my knuckles and look to add to my positions in my favourite stocks.
@dearieme
As much as I like the concept of the HB Permanent Portfolio, I think the short answer to your question is adjust your equity allocation to a level you (!) feel comfortable with. This may well be 25%, if you feel you could stomach a 50% (temporary) loss on this and still sleep well at night.
Took me a long time – despite being in my 30s – to figure out that anything more than 25% in equities would turn me into the weak-willed monkey mentioned above.
@epiktet – I thought it was just me being a wuss and shying away from 100% equity allocations!
My target is 50% equity allocation, but I don’t know if that will prove to be too much – having never been invested through a major pullback.
@dearieme – best cash rates are around 3% for 5 years. I think it just has to be sucked up. Personally I wouldn’t remove anything from an ISA wrapper unless I really needed to spend it. Unfortunately all my cash is taxable, paying between 2 and 4%. One thing I’ve concluded over the past few years is that I should try to ladder the cash deposits and use the longest fix I can for each one, 5 years, as each matures roughly annually. Then you’ve got some hedge against rates rising as you can reinvest at least some cash each year, and each ‘rung’ is benefiting from the best available rate at the time. I’ve been caught out by investing in too many 2 year deposits, thinking that rates could only go up from here….
I am waiting for P2P ISAs, then will move some cash that way
already have a ZOPA account, so ready to move when they bring them on to the market
I think it looks pretty attractive once you get the tax free option
31 here and I don’t feel like I’m struggling to catch up, very few people younger than 30 give any real thought to investing!
I’ve always had a pension and have a small preserved DB pot from a government job, a stakeholder pension (went indexy with this last year) and chunks of LifeStrategy 60% (small) and 80% (larger).
Luckily I don’t feel the urge to spend all that much, but doing something that’s different from the herd is very tough at times. When peers are talking about cars, consoles and season tickets you do feel like the odd man out. Which is funny, as none of the things that I’m ‘missing out on’ are things I want. The human brain is a complex, silly thing at times.
My main takeaway from index investing is that my ego makes no difference to my success (it might even reduce it). This causes some cracking arguments, including with an IFA relative who has made a lot of money during property and equity booms and refuses to accept that a ‘lose the fewest points’ strategy might work.
I was 16 when I first started investing in shares and I started out with £250 purchases then the floatation of the electric companies I went in with everything I had,a few years later and trebling of my investment I sold everything for a run down house,then let it out,after that it just escalated into F I.
Everyone has to start somewhere and with the information available now compared with when I started out is fantastic, this site especially gives some fantastic articles which I share on Facebook,but I have found out not everyone is interested like us,if only they knew I was giving them the blueprint to financial independence.
Its hard to tell people how important compound interest is without sounding a bit freaky or geeky.
@ Luke – Yes, I get that odd man out feeling too sometimes. It’s only natural to want to form stronger bonds with your peers, it’s just a shame they’re into the wrong kind of bonds 😉
Steve makes an interesting point too about people’s lack of stamina when it comes to personal finance. A lot of people are interested for 5 minutes when they find out I know a bit about investing but very, very few genuinely want to learn anything about it. Even people who are good with money from a salary or bargain-hunting p-o-v soon wilt when it comes to investing.
So much about investing seems inimical to the human brain that expecting people to manage their own financial fate through defined contribution pension systems is tantamount to throwing them to the wolves. To me that’s the strongest reason to be cheerful about the mooted move to Dutch-style collective pensions.
“expecting people to manage their own financial fate through defined contribution pension systems is tantamount to throwing them to the wolves”: it falls into the class ‘fine theory, wrong species’.
In my late 40’s now but started with a pension at 21 and luckily started investing in my late 20’s with PEPS and ISA’s later on. I’ve seen the crashes and peaks and treat them with the same…. feel a Kippling IF moment coming. Places like this site provide so much good information and information is power… well sometimes…. read the enjoyable confessions booth!!
30% equities, 60% ladder of index linked gilts, and 10% cash and gold. I’m not going to shoot the lights out that’s for sure but I’m content with my lot!
Such a helpful article, thank you.
It is disappointing that so few people you meet in the real world are interested in investing. My husband made me promise not to discuss investing at dinner parties as our friends’ eyes would glaze over!
However, with the advice of a good IFA I did start Sipps for my two sons when they were children in 2010, and once they turned 18 years old I gifted each of them the annual allowance for an ISA. Both of them have substantial ISA’s (untouched) as well as Sipps AND they are interested/engaged in investing on their own account too. So I take that as a parental win.
I see the usual suspects have turned up to provide the piss at the first hint of a parade. Not everything needs to be run through the Poverty Olympics. There’s a difference between toughness and misfortune — one’s a mindset, the other’s circumstance. And no, I don’t need a sermon about starving children; this is an investing blog, not a guilt-trip convention.
I fully accept that a higher income allows for a higher savings rate — much of life’s cost base is fixed — but it still takes mental discipline to deliberately and consistently live below your means, especially when every social platform is screaming that your peers are living better and urging you to buy the maximum lifestyle you can’t quite afford.
Good article, TA.
Thanks TA for the timely reminder. The journey to FI can be very lonely indeed. I’m grateful for the community we have here.
JPGR -rtd 23 yrs ago with 30/70 -currently 35/59/6 -equities/bonds /cash
3 index tracker funds only
Now 79-worked for me -so far!
xxd09
@xxd09
You’ve made my day. The warm comforting glow of confirmation bias!
Is JPGR one and same as JP Greaney of ‘retire early’ fame? If so, awesome website, chapeau!
@HS – to be fair, they turned up quite a long time ago. It’s always fascinating seeing the comments when there’s a good chunk of time between them, over a decade in this case!
@Bellabeck – good work on the SIPPs! Time for me to guilt trip my parents for apparently not giving a damn about my old age 😉 To be fair, there was no such thing as a SIPP when I was a nipper.
As a term “passive investing” may turn people off. I think of it as fire-and-forget investing, F&F being a term I learnt from computer games in the ’80s.