You could be the smartest person in the world but that doesn’t guarantee investment success if you don’t have the correct temperament.
Or you could have all the willpower in the world but if you don’t have the right systems and rules in place eventually you’ll slip up when it comes to saving and investing.
Behavior trumps all when it comes to investment success and the best way I’ve found to stay consistent when it comes to behavior is by instituting a rules-based approach.
One of the ways I do this with my own money is by bucketing things out by long-term and short-term money.
Short-term money is any savings that will be used in the coming months or years; things like emergency savings, travel funds (remember travel?), infrequent large expenses and any other short-term financial goals or variable liabilities. This money is kept in an online savings account or short-term municipal bond fund.
I don’t take many risks with this money because the downside of it being far less than expected when we need to spend it vastly outweighs the potential returns I’m giving up by not taking more risk.
My long-term bucket is mainly tax-deferred retirement accounts. We take advantage of our 401k, 403b, IRAs, 529 plans, and SEP IRAs for longer-term savings goals. The benefits of these accounts are fairly straightforward:
- they’re tax-deferred
- it’s easy to automate contributions and rebalancing
- there are barriers in place to keep the money invested
The last two bullet points help the most from a behavioral perspective because it forces me to automate good decisions ahead of time and avoid touching the money or tinkering with my investments. Barriers to entry like this can be extremely helpful for not only your long-term performance but also keeping your emotions out of the process.
Outside of these two buckets, I also have a brokerage account that makes up 5-10% of my portfolio. I view this as my fun portfolio (if there is such a thing). This is a taxable account where I put any excess savings to work.
This is the only bucket of money where I:
- pick individual stocks
- build up cash at times to make larger purchases
- invest in stuff I normally wouldn’t in my retirement accounts
- have no formal investment plan
This portfolio sleeve scratches an itch by taking more risk and buying some investments I normally wouldn’t.
I’m still investing for the long-term in this account and don’t do much selling but it’s a psychological trick more than anything in that this 5% allows me to leave the other 95% alone.
I have, however, noticed a few behavioral ticks about this account that have been amplified by the crash. Here are a few observations:
I check the performance of individual stocks way more than my mutual funds or ETFs. I still haven’t checked the balances for any of my retirement or college savings accounts. What’s the point?
I have a decent idea of what they look like since I know the various funds I hold based on my asset allocation.
But I check the performance of my fun portfolio all the time. I have an app on my phone so it makes it easier to look. I probably check it once a day when the market is open which is overkill.
This hasn’t forced me into making any irrational decisions just yet but it sure makes it more tempting when you’re constantly looking. Daily performance is a useless metric but I can’t help myself.
Life as an investor is far easier when you’re not constantly paying attention to your portfolio.
Holding cash plays mind games with you. I’ve been making purchases in this account throughout the sell-off, beginning in late-February and going all the way through the carnage in late-March.
Some buys were timely while others were far too early during the downturn. So it goes.
But I made a handful of transfers into this account throughout March that have been sitting in cash ever since. I made another one this week.
I like the idea of building up a cash pile to potentially take advantage of any further market dislocations that may come about from the crisis. I probably would have been better off just putting that money to work the second it hit my account.
Could this cash come in handy if markets see another big decline in the months ahead? Sure.
Is it worth the extra stress involved in trying to pick a better entry point? Probably not.
Automating your contributions takes the guessing element out of the equation when putting cash to work and helps avoid second-guessing about the timing of your purchases.
It’s easier to second-guess your decisions when you try to time your buys/sells. Checking performance more often and trying to time your trades forces you to become an outcomes-based investor.
Good outcomes are the goal when investing but being a process-based investor is far easier on the psyche, invites fewer mistakes, and helps you avoid over-thinking your investment decisions.
Every investor assumes they’re making good decisions when they make a trade. But willpower has its limits so automating good decisions ahead of time almost guarantees you’ll avoid crippling mistakes at the worst possible times.
Outcome-based investing is sure to lead to a huge mistake eventually.
It’s good to have a behavioral release valve. Having said all of this I still enjoy having this fun portfolio because I enjoy following the markets.
And if making some moves I wouldn’t normally make in my brokerage account allows me to stay disciplined in my other accounts then it’s worth it as a behavioral release valve.
How I’m Managing My Own Money Through the Crisis