Do you have a personal investment policy statement? Probably not. Most people don’t. You may think that putting one together is too much of a hassle, etc. Which I get. Who wants to have one more think on their to-do list? That being said, I think a PIPS can in the short (and long) save you time and mental energy.
The question is how? One way a PIPS can do this is by eliminating stuff that you are simply not willing to invest in. This could be fund types, strategies, individual securities, etc. By narrowing down the list of things you ARE willing to invest in you save yourself the trouble of going through this process every time you come across a new investment…and there is always a new investment. Ben Carlson at A Wealth of Common Sense writes:
The downside to this smorgasbord of fund choices is that we’re constantly tempted to change our portfolio, strategy, or asset allocation. Investors are inundated with new funds, market opinions, and recommendations on a daily basis. No one has the ability to sift through all this noise to make an informed decision.
It’s best to stop trying to figure out if every investment option is right for your portfolio and instead define what you’ll never even look at in the first place to save yourself the mental strain.
Mental strain. Our brains don’t like it. That is why our brains have evolved so many shortcuts, heuristics and hacks. In short, to save energy. On of the reasons why investors get into this cycle of jumping from stock to stock, fund to fund and strategy to strategy is the desire maximize returns. On the face of it, this sounds reasonable. Who doesn’t want to maximize the returns on their portfolio?
The problem is this maximizing behavior usually ends up costing us more than it gains us. Joe Wiggins at Behavioural Investment writes:
For most of us attempting to maximise our investment decision making simply leads to value destruction as we chase yesterday’s winners, trade too frequently and live in constant regret that the investments we don’t own are performing better than those we do . Instead of this, we should be content to satisfice. Find an investment plan that is good enough – based on sound principles (around issues like fees, rebalancing, diversification and compounding) and suited to our objectives. Then stick with it.
Satisificing isn’t giving up. It’s a recognition that there is a cost to continuing to search for better alternatives. This applies not only to investing but to a lot of other areas in their life. Who hasn’t found themselves paralyzed in indecision trying to choose between two very similar refrigerators, etc. At least with a refrigerator you are likely to keep that item until it dies or you move. Unfortunately, portfolios are much to hop between, based on recent performance. Wiggins is right about the value of finding a portfolio and simply STICKING WITH IT.