One of the things I mentioned in the interview for Äripäev was that I’m a boring investor and I recommend investing in a way that’s boring as well. I had a few people ask me after reading the article what exactly I meant by that, so I thought I’d write down the principals of what I consider “boring” investing.
The dullest investment related stock photo I could find
1. Tolerating potential risk
Talking to many people, one of the biggest concerns I keep hearing again and again is the worry of what they’ll do when the market crashes or one of their investments fails unexpectedly.
What do you do? Realize that there has been a mistake in your investment strategy because steady and “boring” investing should not cause crippling stress. There are generally two reasons for your investments to do badly – either (exceptionally) bad judgement calls when investing or an unprecedented market movement. If you’ve made a bad judgement call, then learn from it and don’t repeat it. If it’s a surprise situation on the market, then take comfort in the fact that everyone else is suffering though the same issues.
How do I know if I make good investment decisions? Experience. I’ve made some bad calls when investing as well, what matters is that you learn from them and don’t repeat them. Of course there is a chance that something might go wrong, but that’s something you have to find inner peace about – if you can’t then investing might not be for you. A boring investor sleeps reasonably well not matter what the market situation is like.
2. Reasonable time expenditure
At first investing seems like a pretty high effort-high time investment field. There are several reasons for this, among them lack of financial education and a relatively steep learning curve to many types of investments.
How to control your time usage? While it is tempting to try and read everything possible there is about the world of finance, then at times it might be reasonable to control yourself. How much of a real return do you really get from reading another 10 investment books? I definitely got more of a return from going to the RSÕ training course than I did from the past 5 finance books I read (similar time investment). A certain level of financial education is of course necessary but once you’ve reached a certain level of knowledge you should be aware of how you use your time. (I’ve by now admitted to myself that reading up on investing is more of a hobby by this point.)
Am I spending too much time on investing? There are several theoretical ‘rules’ about proper time spent vs. market returns. I’m currently thinking towards the following idea (due to the size of my portfolio, may be subject to change) – every 5000€ in your portfolio deserves 0,5-2 hours of monthly time. This of course depends on the type of investments – social lending might take less, real estate takes more (most investments take less time, the longer you own them). Take a moment to think though, if you’d be better off working an extra hour to get more starting capital as opposed to reading another book. A boring investor gets real returns on their time.
3. Good habits
Keeping good habits is easy when everything is going well. People who are trying to quit smoking find it easier during a low stress period in their lives and it’s easier to go for an early morning run during a sunny weather. The first problems with maintaining and building good habits come when things stop going so smoothly.
How to build and keep habits? One of the more difficult habits I’ve gotten into in terms of investing is starting the pay yourself first system. Transferring money into my investment accounts at the start of the month creates a certain level of uncertainty – what happens if something goes wrong during the month? Transferring money into our stock account is definitely less motivating when you see that the account is demonstrating significant red numbers. This is why above all your focus should be to keep rational, analytical and systematic. When you make decisions about investments or changing your habits ask yourself – why? why now? why not some other way?
What do I do when I’m slipping? Definitely do not spend time logging onto your brokerage account every day to check whether the market has gone up or down. If you’re starting to suspect that something is wrong with your investment plan then discuss it with a fellow investor, read what others are thinking or just take a day or two to think. A boring investor makes carefully considered decisions based on data and analysis, with a clear head.
The road to becoming a boring investor
There is no secret tip or trick here. It’s mostly discipline and refraining from knee-jerk reactions. Of course being a boring investor becomes easier as time goes on and you know more about the market but it’s completely possible when you’re just starting off.
While you should of course be wary of using past performances as indicators for future returns, then have some faith in historical returns provided by the market. Whether you put your belief in investment books, Bogleheads philosophy or follow MrMoneyMustache or have some own investment theory of your own, the key is still consistency. Even if the market drops a terrible 30%, then as a boring investor you know that it’s time to get buying, learn all that you can from the experience and that you still have infinitely more investments left than people who haven’t invested at all.