Investor personalities play a huge part in behavioral advantages (and disadvantages) faced throughout a lifetime of building a nest egg. Some people (perhaps the lucky ones!) are bored by investing, and would rather buy a few funds, set them loose and cease worrying about how they are doing. Ironically, the more one works at one’s investments, the worse one might do thanks to turnover and taxes, performance chasing and other pitfalls. And of course, as intelligent investors, we all want to do what we can – and may find it hard to sit still and let the power of compounding and low-cost, low-tax index funds work for us.
Tune Out the Noise: There are a few ways to approach this problem, though the best is probably the simplest: avoid looking at your performance too frequently. Internalize ideas like ‘random walk’ and ‘reversion to the mean’ and accept that there is more noise the signal coming from the day-to-day investment talk shows. Know that you have researched and chosen your portfolio well, and that even rebalancing is not 100% essential (in fact: doing it more frequently than annually may lose some natural benefits of momentum).
Tactical Core-and-Explore: For some it can be fund, and for others a slippery slope, but there is always the option to have a well-defined zone in which one can tilt one’s portfolio based on valuations and other information. It is important to clearly delimit what you allow yourself to do, so you are not carried away with emotions when it is time to make difficult decisions after large increases or drops in various asset classes. Even buy-and-hold advocates like Jack Bogle suggest this is a fair approach to take when the market is apparently very overvalued.
Play Money Investing: And then there is the most dangerous (and/or most fun) of them all: the so-called ‘play money’ account in which anything goes, instincts rule and to which gambling is the best analogy. Here, again, it is all about rules and boundaries and knowing yourself – if you can safely take, say, 5% of your total portfolio and use it how you wish without jeopardizing your plans or putting more money in when you lose what you have, well, maybe it is worth doing. Just don’t take your successes to mean sure victory in the future – luck, like any gamble, plays a critical role as well.
Core-and-explore strategies probably won’t boost long-term returns by a lot, but they can give one a sense of greater control of one’s destiny (for better or worse!). Losing 5% of a portfolio to dumb decisions might not be such a bad thing, either. After all, a lot of wise investors made mistakes early on that caused them to realize which gambles were worthwhile and which were folly all along.