What You Can Control In Your Investing...And What You Can't

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In his post this morning, investment professional Ben Carlson writes, "Investors with a truly diversified portfolio are always going to hate something that they own." I love this sentence. It's absolutely true —and not by chance. Diversifying a portfolio means actually planning to have some crappy investment in place at all times. Sounds ridiculous, right? But this is part of a strategy I use in my own family's accounts and I stand by it for a simple reason. I don't believe in reliable prophesies. So, what I have left is mostly history, patience and math. If you don't have a working crystal ball on hand (and assuming you aren't involved in insider trading), you are going to want to be very clear with yourself about what you can control in your investing and what you can't. Here's my list to get you started:

  1. Diversification! There are just too many random factors in the world that can affect any particular company we invest in, but we know our chances of success are better if we have a hand in a lot of different companies. Even if I feel really great about a company, I don't put all of my eggs in one basket;
  2. Asset Allocation. Government bonds are generally boring and right now, no one I've seen is betting on them to go up in value (bond values usually dip when interest rates go up). All the same, I keep a "slice" of bonds in any but the most aggressive portfolios. Why? Because as loans (rather than equity), bonds behave very differently than stocks and other investments. When the 2008 crushed investment accounts all over the country, those we managed didn't fare so badly. U.S. government bonds might not soar in value, but they don't tend to crash either, and that can position you, as an investor, for a smoother recovery from the world's financial catastrophes (asset allocation). As Carlson points out, that does mean that you will hate something in your portfolio on any given day — but which investment you hate will change over time.
  3. Fees! It might not seem like it, but one thing you do always have some control over is your investment costs. This has been a big deal in the financial news lately. Most people will blow by a news story about the Department of Labor's efforts to enforce a fiduciary standard on advisors, but believe or not, that story was for you. Whether in your 401k, your child's college investment account or your own stock trading account, you will have to pay fees. But you can end up paying big fees for no good reason. The DOL is trying to force those advisors hired (by your employer) to manage your 401k plan to stop pushing unnecessarily large fees onto you — and the difference could add up to thousands of dollars over your working life. Let's hope the effort succeeds!
  4. Taxes. No, you can't get out of paying your taxes (and, as a fellow taxpayer, I don't really want you to), but you do have some control over how much you pay. Start by asking these three questions: are you getting a tax break through qualified retirement accounts (like that 401k or IRA)? Are you choosing tax efficient investments in your other accounts (bonds, REITs and some mutual funds can spin-off taxes like nobody's business!)? Are you buying and selling too often in your taxable accounts (short-term capital gains tax vs. long-term)?
  5. Patience. Patience. Patience. This is by far the hardest part of investing. Any of us, given enough time and effort can learn about the products and systems that make up our financial world. But even the experts struggle to remember their own investment strategies in the frustrations of the moment. Stock traders depend on as much volatility in the market as possible —they need the rapid (sometimes measured in milliseconds) soars and dips in value to make (or lose) money quickly. And they feed that volatility with their rapid trading. But an investor is not a trader. An investor bets on the long-term probabilities, ignores the stock tickers and sticks to her strategy. It isn't especially fun, or especially easy. But it has a history of working better than anything else.