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Setting Boundaries

Marc Bisbal Arias  |  May 11, 2020

HOW MANY TIMES have you found yourself doing things you don’t want to be doing? It might be binge-watching Netflix, eating junk food or mindlessly scrolling through your favorite app. This is something we all struggle with.

Investing is no different. The behaviors we should avoid are mostly clear, but it isn’t always easy to follow through.

I remember vividly the day I joined my first employer, Chicago-based investment researcher Morningstar, as an intern a few years ago. The first thing I was given was a handbook. “Here is all you need to know,” my manager said as he handed me a 1,000-plus page compilation of articles, studies and reports containing all the basics—and not so basics—about mutual funds and investing. Over the following months, I spent dozens of hours reading that handbook, absorbing as much as I possibly could.

That tome taught me a lot, and most of what I learned was about what not to do. “Avoid high fees.” “More often than not, low-cost index funds will outperform individual fund managers.” “Market timing doesn’t work.” “Past performance doesn’t guarantee or predict future returns.”

I repeated these sentences like a mantra and excitedly shared them with friends and family, hoping they’d make smarter investment decisions. But years later, once I had enough money to start investing myself, I didn’t adhere to the lessons I’d learned. Among my many mistakes: sitting in cash in 2016, waiting for a market correction, and not—until very recently—investing in low-cost index funds.

Why didn’t I follow what I enthusiastically recommended to my family and closest friends? A possible answer: It’s so tempting to do otherwise.

“Surely it will be a better time to invest after a 20% downturn,” I told myself. Except nobody knows when that’s going to happen.

“[Insert famous investor’s name] got a 100% return on [insert hot stock]. I’m going to invest in the latest stock he bought,” you might think.

The financial industry is filled with comparisons, so it’s easy to find people who are doing better and that creates an itch, that impulse to try to find the next tenbagger. We fall for the illusion that it’s easy to earn better-than-average returns and we go hunting for ways to do it—to our own detriment.

Being aware of our shortcomings is the first step toward overcoming them. The second is taking action. That’s why, in an effort to improve my financial decisions and avoid doing the things I know I shouldn’t be doing, I came up with three simple steps to help my future self.

Step No. 1: Automate my investing process, as well as set general guidelines for how much more to invest in stocks if the market falls a specific percentage. This helps me to avoid reacting emotionally and to be more disciplined.

Step No. 2: Create a checklist to aid me in assessing whether doing something makes sense. Two examples: “I am not making a rushed decision based on a hot tip” and “I am not investing just because everyone is talking about it.”

Step No. 3: Start a financial journal where I explain in detail the things I’m doing and why I’m doing them. It’s surprisingly easy to deceive ourselves, so this will serve as proof of my exact thoughts. As I objectively analyze ideas vs. outcomes, I’ll be better equipped to learn.

To be sure, some of the behaviors described above might not seem so bad. For instance, investing in a mutual fund is likely better than not investing at all, even if it’s not a low-cost index fund. Likewise, dollar-cost averaging—something I do—usually results in worse returns than investing right away, but investing gradually can still make more sense from a psychological standpoint.

The other day someone told me, “Thinking that I can successfully pick winning stocks on my own still haunts me.” It is indeed hard to stay course, but we must try and, in trying, we’ll probably be better off.

Marc Bisbal Arias holds a bachelor’s degree in business and economics, and is a Level I candidate to become a Chartered Financial Analyst. He started his professional career at Morningstar, performing research and editorial tasks, and is currently employed by Dow Jones in Barcelona, Spain. Follow Marc on Twitter @BAMarc.

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