Managing your own money is hard, but not for the reasons most people think. Anyone who is willing to put in a few weekends of reading can learn the mechanics of wise investing. It's far more difficult, though, to conquer your own bad impulses.
The best strategies aren't about spotting tomorrow's winners or taking ingenious gambles on beaten-up sectors. They're about setting simple guidelines that let you reap the biggest rewards from a volatile market. So now, as we enter RRSP season, here are five rules that can help.
Embrace simplicity In case you had any doubts, rest assured that you are, at best, an average investor. (Anyone who lacks an MBA, a Bloomberg terminal and 50 hours a week to study the market fits into that category.) So forget about dazzling friends with your ability to spot overlooked stocks. Focus instead on avoiding big blunders.
The most common blunder is our overwhelming impulse to jump in and out of hot sectors and chase performance. In a landmark paper titled "Trading Is Hazardous to Your Wealth," finance professors Brad Barber and Terrance Odean tracked thousands of small investors and found a consistent pattern: Those who traded a lot performed miserably, and those who traded less did much better. When it comes to investing, lethargy works.
Spread your bets The smartest thing you can do as an investor is stick to a well-thought-out plan for divvying up your money so no single calamity will eviscerate your portfolio.
This doesn't have to be complicated. For a well-balanced portfolio, put roughly 60% of your money in a diversified selection of stocks and 40% in bonds or other fixed-income investments. Once a year, rebalance: Sell a portion of whichever asset has done better and invest in the laggard so you return to your original 60-40 split. Over time, this guarantees you are consistently buying low and selling high.
Forget about forecasts (and reputations) A year ago, experts predicted interest rates would rise and oil prices would remain high. Just the opposite happened—and that's entirely typical. Nobody knows what is going to happen to the market.
Just as forecasters flop, most mutual fund managers disappoint. According to Vanguard, more than 85% of Canadian large- and mid-cap equity funds lagged behind their market benchmarks in the 10 years leading up to 2013.
Control what you can control You can't predict what the market will do, or how managers will perform, but you can control how much you pay to invest. Look for low-cost ways to make your money grow. Exchange-traded funds (ETFs) that track major benchmarks, such as the S&P 500 in the U.S. or the S&P/TSX 60 in Canada, are excellent choices: They provide diversification and rock-bottom fees. Or consider fund companies such as Steadyhand or Mawer, which offer active management in some of their funds for roughly 1% in fees a year—an attractive alternative for those who want a human being in charge of their money.
Buckle up Yes, the stock market will plunge by at least 20%; it does so at least once a decade. But stick to a reasonable asset allocation, keep your costs low, rebalance once a year, and relax. You'll do just fine.