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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 [1] 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 [2] 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 [3]

Diversionary tactics are vital for the passive investor, because passive investing [4] 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 [5].

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 [9] offering:

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 [10]. 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 [11].

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:

“Begone, Highly-Concentrated Mutant!”

Diversification [16] 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 [17]. 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 [18] 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 [19] – I’m still swimming in the broad asset classes [20]. 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 [21], learning more about investing, and blogging about passive investing [22] 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 [23].

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