There are many lies that we tell ourselves. Some of them we know are lies and some of them are so ingrained that we do not recognise them as lies.
So if you are a debt investor, you have some clue on what returns you are getting. However if you have an equity portfolio, chances are you have no clue what is happening to it.
- We think we are Judges, but actually, we are advocates: when a nice looking investment idea with emotional pitch is made, we first sign up for the plan. After some time, we realise that we were nicely done in by the story, not by the math. What happened? Well, we rationalised. We are irrational, but tell ourselves otherwise.
- We seek optimisation of our assets. Wrong. Our asset allocation is a function of our irrationality, parents’ behaviour, attitude towards money, greed, etc. In most cases, we do not really have a portfolio but just a long list.
- The markets are efficient: Very difficult to prove this and almost impossible to say that this is wrong. The price gyrations that a single stock can take – or the whole market can take are stunning.
- Collectively we cannot, but I can: Many individual investors accept in private that there are some brilliant fund managers, but in the same breath claim that they can beat the market. To me this is one of the worst white lies that we tell ourselves.
- I understand risk and volatility: Actually we do not. Both these concepts are related, and actually what should be worrying us (especially if we are retired) is a permanent loss of capital.
- Complex solutions are better than simple ones: I can make a very mathematical, statistics-driven presentation or a simple presentation to say the same thing. Most of the audience actually wants to be dazzled by all the pie diagrams, the Greeks, the charts, the correlation stuff, even If they do not understand them. However a simple “these 3 funds suit you” –is frowned upon because they have not been given a choice.
- Fees do not matter: I know of a financial planner who says he is indifferent to where a client does his investments. Great. I saw a few of his clients pay him for his services and then use a platform like a bank – which is a huge double whammy for the client. Fees does matter – in fact it is the only thing that an investor can control.
- Market timing works for me: This delusion does not go away at all. In public, they agree that timing the market, the industry, the cycle, etc. is very difficult. However, in the next breath, they are extremely confident that market timing works for them.
- I can create my own portfolio: Even assuming that a person can trade right in and out of the market, creating a portfolio is a herculean task.
- I know what returns I get: People who do not write down their portfolios or use good accounting software really have no clue about their CAGR, but like car mileage people, they put on a brave front as if it were a big thing!
- I do not need help: I can plan my financial life, make my will, create my portfolio, do market timing, calculate returns, plan for retirement, etc.
When you catch yourself repeating these lies, wake up and smell the coffee. Good morning!
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’