What dieters can teach investors
Reprinted courtesy of MarketWatch.com.
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I have a friend who is a retired banker. As a banker, he ate out a lot. Yet for at least 20 years, I never saw him eat the whole restaurant meal. He always took half of it home. Today he is thin, and I am not. I always cleaned my plate.
Eating and investing have some important things in common.
- In each case, there are huge industries trying to get us to do things that are against our long-term interests.
- In each case, short-term comfort and convenience tend to sabotage our long-term well being.
I was probably around five when I learned I should clean my plate so as not to let food go to waste. Though my parents meant well, this turned out to be a terrible habit.
Parents sometimes give their kids pretty terrible investment advice, too. For example, many young people are told that they are young and can afford to take lots of risks — because they can “always” recover later from their mistakes.
In fact, many parents think such mistakes will make their kids better investors in the long run.
Eating right vs. wrong
Everybody knows it’s not wise to load up on sweets, alcohol, fatty foods, overly processed foods and large volumes of almost any food. Intellectually, we know these things will eventually take their toll on our bodies. “Eventually” is the hidden trap here, because “eventually” seems like just a concept that won’t be “real” until long into the future.
I’m a living exhibit. After a lifetime of what I consider poor eating habits, at age 72 I am struggling with too much weight, diabetes, high blood pressure, high cholesterol and whatever damage may have built up from taking lots of medications to address these conditions.
I know I am the one responsible for my own eating habits, of course.
However, the business establishment hasn’t necessarily been my ally. There are multi-billion-dollar industries dedicated to getting me hooked on expensive foods and beverages. Those products produce huge profits to food manufacturers, fast-food restaurants, marketers, distributors and purveyors — but provide little benefit to me.
Another equally huge industry cranks out diet books, diet workshops, food plans and the like. Although there’s nothing to stop most of us from simply going for a walk, exercise has become big business, too. (Have you noticed the proliferation of fitness facilities over the past 10-15 years?)
Since this is an article about investing, perhaps it’s interesting to ask: Are there giant corporations that make and sell soda and fast foods — while also investing heavily in the diet and exercise industries? Now that would seem like a sure-fire recipe for profits.
In addition to these challenges, it’s very difficult for most people to “set it and forget it” when it comes to eating habits. Every day you have to make the decision of what to eat, what to drink, and how much.
Fortunately, that is easier to establish good financial habits and put them on “automatic.”
Investing right vs. wrong
I’m fortunate that I was able to recognize and discard some awful investment habits early on. I did take some outsized risks when I was young, but fortunately I wised up by the time I was in my late 30s.
In dieting, junk food and super-size portions are our long-term enemies. In investing, the counterpart to junk-food habits are ongoing expenses. Sure, you can pay an extra 1% or 2% a year in mutual-fund expenses, and you may not ever notice it. But the damage is there, eating away at your returns literally every single day the market is open.
Avoiding excessive expenses is quite easy: Invest in index funds. You can easily get great diversification in most of the best asset classes for expenses under 0.5%. The effect is similar to that of purging your diet of sodas, donuts, fast foods and desserts … shucks, I really don’t have to continue that list.
Aside from continuing expenses, active management erodes your returns by increasing your trading costs … to say nothing of most managers’ inevitable mistakes in stock selection and timing. The easy solution: once again, index funds. (Oh, if dieting were this easy!)
Emotions, of course, derail the best of diets and the best of investment intentions. Food advertisers and restaurants spend fortunes learning how to appeal to our emotional needs. When it comes to investments, a couple of the biggest enemies of long-term success are fear and greed.
As I mentioned earlier, putting things “on automatic” is pretty easy for investors. You can save automatically. You can diversify automatically. You can rebalance automatically. If you’re a regular saver, you can take advantage of the market’s ups and downs automatically with dollar-cost averaging.
All these solutions are there, yet millions of investors fail to use them.
One reason, I think, is that eating smart and investing smart both require long-term thinking and dedication. In each case, the ultimate payoff doesn’t show up for a very long time. Likewise, the ultimate price for not having this commitment shows up only after it’s too late to undo the damage and take advantage of a lifetime of lost opportunities.
Here’s one of my favorite quotes from Warren Buffett: “To be a success you only have to do a very few things right, as long as you don’t do too many things wrong.”
Now I’m certainly no nutritional expert. But I think the most important “few things” to do right may be keeping your portion sizes under control and eating a variety of fresh foods, especially fruits and veggies. (You don’t need me to tell you all the things you could “do wrong.” Any half-hour’s worth of TV commercials will be ample reminder.)
In investing, the critical things to “do right” are limiting your expenses, controlling your risk, keeping your emotions out of your decisions, putting things on automatic and practicing smart diversification. Also, give up on trying to beat the market!
As always, some young people will try hard to learn from those who’ve gone before, and others won’t bother. I can’t tell you how to reliably motivate the latter folks to adopt better habits.
But I am very certain of two things: People who eat right are more likely to be healthy, especially in their later years. Likewise, investors who habitually make smart choices are more likely to retire in comfort.
The choice is yours, and I hope you take Buffett’s advice to heart.
For more thoughts on investing, check out my podcast “10 lessons we must teach first time investors.”
Richard Buck contributed to this article.