When it comes to investing, there are so many ways one can go about it. You can make the investing decisions yourself or you can outsource it to a financial adviser. Either way you have to figure out what you want to invest in. Stocks? Bonds? Gold? Mutual funds? ETF’s? GIC’s. You can do the research yourself or leverage many information resources on the internet or in reference books or through formalized learning and coaching. You can adopt an actively managed strategy where you are constantly making decisions and turning over your portfolio on a regular basis or you can take a more passive approach and focus on buying and holding a core group of securities. Value, momentum, or growth? High risk or low risk? The options are exponential and endless. No matter what path you choose, one thing is constant. You will need to commit time to making proper decisions in terms of goals as well as in execution and you need to stay on top of them.
Why is commitment important? One big reason is that the financial industry unfortunately is not interested in making a commitment to improving your financial literacy. In fact the less you know the better. They are more interested in selling you containers or piggy-banks to hold your money as well as products to put in your container that may not be in alignment with your long-term financial goals. As a result, we spend so much time trying to figure what container to put our investments in (i.e. RRSP’s, IRA’s, RESP’s etc) and hardly any time in terms of what we want to put in these containers, which is ultimately going to drive our wealth creation. That’s the whole point of RRSP season. It’s about selling you containers and getting you to put more money in those containers. How you organically grow your piggy-bank is less of a concern to them and how much knowledge you need to make those hard decisions is of least concern.
The first key question I always ask when I meet prospective clients is how much time you are willing to commit to learning and applying towards investing. Traditionally I would use their response to determine the type of learning and coaching they would need. People that were willing to commit the time to understand the intricacies of how wealth is created and learn how to analyze companies and value their stocks would follow one path. Those who couldn’t commit the time would follow a more passive approach of leveraging index based products such as Exchange Traded Funds (ETF’s) or index funds.
There is a wealth of evidence that has shown that taking a passive approach to investing can yield better returns than actively churning a portfolio. Some view passive investing as a “Buy and Hold” or “Couch Potato” approach where just having exposure over a long period removes the probability of missing the big moves in the market. I have always held to this view as an effective approach to investing, however as the nature and complexity of financial products grows as well as the greater interconnectivity in global economies evolve, it is becoming more important to be mindful of these elements and that in turn requires a time commitment.
When I look at the ETF product for example, traditionally there were only a handful of funds that provided a broad exposure to the broad market both domestically and globally and they simply tracked a respective mainstream index. Today these funds have been sliced and diced into more complex products. You now have ETF’s that track countries, industries, and commodities that you can go long or short. You can even track the volatility of the market. Their fee structure is more complex and more importantly the marketing of these products can be very misleading (See my article on ETF’s). On top of this, the benchmarks that these type of funds are holding themselves to are also changing. It turns out that you can’t just blindly drop money into an ETF without truly devoting some time to reading the fine print. Even if you are taking passive approach to investing, you really need to understand the product because it can be marketed as a passive product when in reality it is more of a trading product that can charge higher expense fees. To understand requires time, even for a passive laissez-faire form of investing. You also need to commit time to checking whether your actively managed or passively managed portfolio is in line with your investment goals and objectives. This may not take as long, but it is still a commitment that needs to be made on a periodic basis.
When you analyze the qualities of great investors, commitment is a very prominent characteristic. Great investors are motivated to understand and educate themselves on how to make better investment decisions. They do not view it as a chore but something very important in their daily lives. They are also very diligent in following and tracking the performance of their investments, no matter what type of strategy they adopt. Finally they are also committed to executing their strategy in good and bad times. As humans we are wired to jump off the wagon when the stock market tumbles sharply, when in fact that is the exact time successful investors reaffirm their commitment to investing. So even if you adopt a Couch Potato approach to investing, you should be prepared to spend some time to ensure your long-term financial goals will be met.