Investing doesn’t come natural to the human mind as deeply ingrained behavioral biases set us up to make a lot of mistakes.
This makes investing look superficially simple and yet very hard to actually do. The primary difficulty lies not in finding a profitable portfolio strategy (a lot of excellent resources are openly available), but in weeding through all the information out there and finding a realistic approach that fits you and incorporates methods of dealing with your behavioral biases, so that you can stick with it consistently.
In my mind there are several basic possibilities to tackle the challenge of how to approach investing:
First – Play not to lose: keep it very simple and learn about a solid buy-and-hold portfolio allocation to different asset classes.
Write down your portfolio rules to avoid basic investment mistakes when things are emotionally charged in bull and bear markets.
A good asset allocation is the major factor influencing investing outcome.
Best practice would be to outsource investment decisions, or have a fixed yearly maintenance date and otherwise look at your portfolio as seldom as possible. A low-fee Robo Advisor with a good allocation concept would do the trick. This would be a great goal, if you are not very interested in the process of investing or don´t want to spend a lot of time on it.
Realistically it will still be hard not to chase the performance of the market. People tend to consistently do the wrong things at the wrong time and buy near market tops, infected by greed and sell in panic near market lows.
A diversified asset allocation forms the basic foundation of my portfolio, with additional strategies added with the goal to improve performance. I go into more details about this in part 5 and part 6 and throughout this blog.
At my site you can subscribe to a newsletter detailing a very effective tactical ETF portfolio following the Meta Strategy, that I developed in 2018 with the aim to reduce the painful drawdowns a buy-and-hold portfolio suffers regularly. That would be a possible sophisticated, low maintenance solution derived from the principles in this book.
Third – Treat investing like any other profession or serious endeavor, similar to mastering a musical instrument or learning a foreign language, and study it in depth. This will take as much time and effort as gaining proficiency in any difficult area – my estimate is 3-5 years of intensive learning. But it has the potential to form a sustainable education – acquiring skills that are beneficial for the rest of one´s life, while being intellectually stimulating, intricate and interesting.Providing an orientation in going down this active path is what this guide is about.I think the only realistic short cut is the second possibility: diligent research to gain a good understanding of one particular area and then finding a resource to take most of the day-to-day work off your hands. Usually though, if I can judge from my own experience, the first approach of largely passive investing should yield returns in line with the market averages, if mistakes can be avoided. Going down the path of active investing will very likely reduce returns (sometimes dramatically) for an extended period of time, before improvement materializes.I made the conscious decision to aim for market-beating returns, because I found compelling evidence throughout my research, that many outperforming strategies and investors do actually exist.
*The seminal book on behavioral biases is „Thinking Fast and Slow“ by Daniel Kahneman
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