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Simple mind games to stop passive investors hitting self-destruct

Investing legend Benjamin Graham skewered the secret saboteur within all of us with this warning:

“The investor’s chief problem — and even his worst enemy — is likely to be himself.”

In other words, we’re all just a bunch of strategically-shaved apes, driven by instincts that are liable to nosedive our investment vehicles as surely as a chimp in charge of the space shuttle.

I felt my very own inner chimp stir recently, and it made me realise I’d invented a string of mind games to keep him diverted and out of investment mischief.

Game your primate brain with a string of short term rewards

Diversionary tactics are vital for the passive investor, because passive investing is famously dull. The slow-cooking of the investment world.

That’s just great if investing bores you rigid. You can leave things to stew without you, and you’re almost certainly not reading this sentence. But if you’re a hands-on kinda person, then those hands need to be kept busy, lest you’re gripped by the urge to market-time or chase performance.

My that gold looks shiny!

Game your brain

So I’ve been gaming myself. Video game designers know that to keep coaxing players onward to the ultimate goal of the final level, they need to lay a breadcrumb trail of little rewards along the way. Slaying orcs, collecting treasure – the kind of light relief that keeps your pleasure centres firing during the long trudge to the endgame.

What then are my investment orcs, so to speak? Here are my big three:

  1. Cost-cutting
  2. Money saving
  3. Diversification

Let’s look at each in turn.

“Take that, Inflated Fee Beast!”

Keeping investment costs low leads me to obsessively seek out tracker funds with:

When trading fees are involved, I use lump sums to dilute the cost of the fee and scour cyberspace to find the most competitive online brokers offering:

  • Low dealing fee – sub-£10 is possible
  • No annual management charge
  • Low dividend reinvestment charge
  • Regular trading scheme – £1.50 per trade is possible
  • No inactivity fee
  • Low transfer out charge – £10 per investment

To me it’s a shaving game: Every fraction I can trim from my costs is a small victory – like taking a tenth off my time in a marathon

It may amount to buttons over the years, or it may add up to a significant sum.

The main thing is it keeps me occupied.

“Have at you, Cash-Gobbling Monster!”

Then there’s the saving game. Saving is the foundation of investing. It’s only by saving hard that I have a monthly sum to invest. But happily, the savings habit can be reinforced by your investment plan.

Without my monthly drip-feed target to hit, I’d find it much harder NOT to blow my cash on good times and tat.

The ground rules of the savings game are:

  • Having a big enough goal (such as paying off the mortgage and/or a comfortable retirement) to convince me to defer gratification a while.
  • Measuring my savings rate as a percentage of income (or in pounds and pence) gives me a number to fight for. When the monthly number goes up, another battle is won.

“Begone, Highly-Concentrated Mutant!”

Diversification is a major tenet of passive investing. Happily, expanding your holdings into complementary asset classes also satisfies the basic human urge to collect.

Whether it’s trophies, stamps, or orcs’ heads, we all just love to accumulate.

Especially for a new investor, every new asset class acquired feels like a major accomplishment. Status is enhanced (as if we’ve gone up another level in a video game) and feelings of security strengthened, as if we’re building a mental bastion out of all that stuff.

My own passive portfolio owes much to Tim Hale’s Home Bias – Global Style Tilts portfolio. My rational self had good reasons to use it as a model – but there’s a fair chance that my primate brain also wanted to have 11 funds worth of empire-building fun.

Most passive investors can err on the side of simplicity. There’s no need to have that many funds, and eventually the law of diminishing returns and the danger of overlap dim diversity’s halo effect.

But I admit I’m an asset-class junkie. I’m always on the look out for new market segments that exhibit low correlation with my existing holdings.

That doesn’t mean I’m neck deep in ETF exotica – I’m still swimming in the broad asset classes. But I keep myself entertained with the thought that one day I might rope off 10% of my portfolio and invest it in more unusual areas, like frontier markets or timber.

“Behave yourself, strange ape-man!”

Those are not the only games I play to keep myself entertained.

Meticulous record-keeping, tax control, learning more about investing, and blogging about passive investing all offer little bio-chemical treats that help keep my brain in check.

The important thing is that each cheap trick employed offers a compound reward. The positive effects of cost-cutting, money-saving and diversification (within reason) build upon themselves over the years to help, not hinder, my investment goals.

So investor: Know thyself and develop your own mind games that can keep you on the straight and narrow. And if you’re already practised in the art of self-manipulation, I’d be fascinated to hear what techniques you use.

The Accumulator

{ 14 comments… add one }
  • 1 Winchop1 December 21, 2010, 10:38 am

    “My that gold looks shiny!” hahaha

    Yes, it does, doesn’t it?? Soooooo beautiful… Very tempted to buy a few sovs…

    No, grit my teeth, and stick to the passive route. I know it makes sense.

    But those Victorian sovereigns are gorgeous… Oh dear!!?!

  • 2 Alex December 21, 2010, 9:50 pm

    1. Thanks for yet another useful article.

    2. Correlation is clearly a useful tool for diversification. Do you prefer to calculate it over a particular length of time? If so, what? Even then, how many data points should we use over a given period? That is, how granular should the sampling be?

  • 3 The Accumulator December 23, 2010, 9:14 am

    @ Winchop1 – my feelings exactly!

    @ Alex – I just keep a general eye on asset class correlation using sites like http://www.assetcorrelation.com

  • 4 Alex December 23, 2010, 4:44 pm

    1. Thanks for that site – I hadn’t seen it before. I notice that it highlights the issues I mentioned (length of time etc).

    2. I think we always have to remember that past performance does not necessarily predict future performance. Also, there is the problem of the correlation relationships changing significantly upon some external shock. In this case, the diversification can disappear just when we really need it…

  • 5 Caronia August 12, 2014, 10:02 am

    Accumulator,You didn’t study psychology by any chance did you?
    As I’m sure it was no coincidence that you happened to write this piece when you did.
    I’ve been in semi-panic mode for the last month or so,worrying whether the S&P500 was about to fall off a cliff or whether the major geo-political situations might knock 25% off the value of my holdings.
    As I only started investing in 2010,I have no experience of a ‘bear market’.
    and as a result my finger has been hovering over the sell button! However, I had a chat with myself to remind me that I am a ‘passive investor’ and these situations WILL arise from time to time. Hopefully I’ve passed my first test !

  • 6 EarlyRetirementGuy August 12, 2014, 11:36 am

    I shall admit to being one of those ‘passive investors’ who cant help but check the fund value with some regularity. Luckily all my purchases are maintained by an automatic monthly direct-debit and auto-invest. Currently in the Lifestrategy 80 Acc which also handles the diversification and dividend-reinvestments. Now to try and calm the human nature of constantly wanting to track and celebrate each 1% increase 😉

  • 7 Mr N August 12, 2014, 12:40 pm

    “History may not repeat itself but it does rhyme” Mark Twain.

    Anyway, I fell into this trap this week. Having found the cheapest entry point and having saved the £, it was time to invest in my ultra lazy LifeStrategy fund this week and I did so, keeping some cash in reserve. So far, so good.

    Until… what’s this?! Company X release an RNS with a not-as-bad-as-expected set of results AND there is talk of a takeover. Quick check of fundamentals look good. Well, well. It is fate, I thought, that I am on the (proper) LSE website at 7.00am to watch this all come in. Reserve cash duly used. Buyers remorse setting in as I hit the buy button alongside a million different cognitive biases (of which I am more than aware), and here I am sat nursing a 3% loss.

    “It will rise though…”

    Never again.

  • 8 dawn August 12, 2014, 2:30 pm

    As i cant touch 50% of my investable cash till next year, most [all] of my spare time is taken up reading, studying and learning what to do for the best with the rest come next april, more than keep looking at how what ive done so far is doing.

  • 9 Cerridwen August 12, 2014, 8:39 pm

    At the moment my itchy fingers are being forcibly restrained by the snail like pace of my ISA transfer (from CIS/RLUM to iii – 6 months and counting). However, being kept from trading in this way is not as good as it sounds from a passive point of view as I desperately want to sell some of my UK equity to buy more trackers. Unless fate is trying to tell me something? 🙂

  • 10 The Investor August 12, 2014, 10:10 pm

    @Mr N — I have been there! As an active investor (for my sins) I think it can reach parts that passive investing cannot, but to be honest sometimes I think that’s in the same way that vodka and cigarette smoke can, too. 🙁

  • 11 Mr N August 12, 2014, 11:21 pm

    Quite, although I am more of a whiskey man.

    There is immense satisfaction in making an astute (active) investment. The results are more instantaneous, it serves as an ego boost (as there is somebody else at the wrong end of the bargain) and there can be no denying the feeling of knowing you’ve done something off you’re own back rather than follow the global herd (all simplified, I know).

    I suppose a combination of these things keep tempting me to the dark side on occasion. I can’t help it. And yet, I feel this sense on anguish each time…

    Now a 1.8% rise. See. I told you. 😀

  • 12 William August 13, 2014, 2:02 pm

    I was wondering whether a article comparing passive investment to the 26 Investment Trusts which are still in existence today and existed in 1914 at the start of WW1 could be in the offing? These investment trusts have appeared as articles on the AIC website and the Telegraph. It would be interesting to look at them from (1) performance and (2) expense against tracker funds/indexes.

  • 13 The Investor August 14, 2014, 3:58 pm

    @William — Agree it would be interesting to read, but that sort of deep analytical research/number crunching is well above our pay grade. You’re looking at a few weeks of work there I’d imagine, plus you’d need to make various assumptions about indices and hypothetical trackers (since tracker funds weren’t invented until the 1970s).

    Furthermore, going back to 1914 you’re deep into a much more inefficient market. I am confident if you transported me back in time to the 1900s, with the knowledge I have now (not of what will go up / imminent bear markets — you can wipe that from my memory if you like — but of fundamental valuation, behavioural investing etc) I would compound money at a high rate versus the index.

    Of course investment trusts operating then were operating in a pre-Ben Graham, pre-Buffett, pre-EMH era too, but equally they also benefited from juicy stuff like insider trading.

    In summary: It’d be interesting to read, but I’m not sure it’d tell you much of implementable value?

  • 14 dearieme August 15, 2014, 12:31 am

    There’s no reason not to have sovs in a passive portfolio: just model your policy on the Harry Browne Permanent Portfolio, or one of its competitors.

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