Post #108 - Write down your allocation strategy!

Post #108
Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Make sure your asset allocation strategy is written down! – Good advice

The one person who is most likely to screw up your long term investments is……YOU!

Unfortunately, you (and me, and the rest of us weak humans) are not psychologically prepared for investing in the stock market.  Blame evolution.  Cavemen didn’t have to contend with the stock market.  They had simpler worries: large nasty animals, starvation and other cavemen who didn’t like them.  Mankind has not evolved to be good at stock market investing.  We have evolved to be good at running away from large nasty animals, buying groceries, and hiring lots of policemen to protect us from the bad cavemen.  Actually, I’m not sure about the buying groceries thing.  My son’s college fridge looked like a snack food concession at the ballpark.

These are the types of mistakes you might make without a written strategy:

1. You will want to follow the crowd.  If everyone is making tons of money investing in pork belly futures, you will want to buy some for yourself.  Following the crowd was good 1 million years ago when the crowd was running away from saber tooth tigers.  But it’s not good in the stock market.
2. You will be too afraid to take on enough risk to make reasonable returns.
3. You will be too bold, and take on too much risk in an effort to get rich quickly.
4. You will want to take money out of the stock market when prices fall.  Evolution has taught you to flee at the first sign of trouble.  That doesn’t work in the stock market which rewards long term investors with diversified portfolios and punishes those who make lots of changes as they always invest in yesterday’s winners. 
5. You will be tempted to put all your eggs into one basket.  For every one person who did this and made a fortune, there are 10,000 people who walked away with holes in their pockets.  Google Enron, MCI, and Tulip Bulb Mania for some prime examples.
6. You won’t want to rebalance your portfolio.  Rebalancing requires you to sell your winners and buy into the losers.  This goes against what you would consider to be rational thinking.
7. You will start to pay too much attention to your investments.  This is bad.  The more you look at your investments, the more changes you will make.  More changes mean more transaction costs.  More transaction costs mean lower returns. 

How do you prevent these mistakes with a written strategy?

• Each time you are tempted to do something that goes against the strategy, take the written strategy out of your file cabinet.
• Roll it up carefully.
• Hit yourself over the head with the rolled up strategy.
• Re-read the damn strategy.
• Remind yourself that you wrote it for a reason.  So you wouldn’t forget your long term goals and do something stupid.

If you find that just re-reading the strategy isn’t enough to fight the temptations all around you:

1. Sell your radio and TV on Ebay.
2. Stop surfing the net.
3. Cancel your newspaper subscriptions
4. Never talk to anyone about the stock market.
5. Don’t read those silly magazine articles about “The Five Best Ways To Invest New Money Today.” 
6. Switch your Home Page from InvestmentsToday.com to ILoveBunnies.com.  Don’t let the guys in the poker group know what the new Home Page is; they may not want to play with you. 
7. If someone starts talking about their investments at a party, stick your fingers in your ears and say “Blah, Blah, Blah” very loudly until they move away.  I did this at a wedding recently.  It worked so well I was asked to leave. 

Special caveat: If the circumstances in your life change dramatically for better or worse, you may have to change your written strategy.  If you inherit $1,000,000 from Uncle Johnny you will need a new asset allocation strategy.  If your house burns down and you don’t have insurance, you will need a new asset allocation strategy.