Investing is simple, but not easy

The qualification is due to the fact that in most cases, it is a human being making the investment.  

Our inability to control our innate behavioural instincts means that we act in ways that turn a straightforward task into an overly complicated one. Like losing weight, investment seems to be one of those activities which we assume has to be difficult - no pain no gain, right?

Whether its weight loss or investing, most of us are able to intellectually understand the empirical evidence for a successful strategy - it's just that in practice most of us reject it emotionally because doing so makes us feel good.

This seems like a good time to introduce a good old platitudinous bulleted list:

• Have enough time - the longer you have, the better. Don't try to time the market.

• Set your goal as a benchmark for success, not an arbitrary financial index.

• Understand your capacity for risk as distinct from your perception of risk.

• Diversify your portfolio across asset classes.

• Keep costs down, including tax, but don't obsess over the latter.

• Don't look too often, but review at pre-ordained periods.

• Always buy stocks on a Thursday between the hours of 10 and 11am.

Ok, I may have made that last one up. It's an example of what I call a 'money muffin'. Since I started taking care of my weight, muffins are everywhere; this is even though I know that they are completely counter-productive to my rationally set long term goals. The thought of gorging on the lemon drizzly bit, washed down with a whipped cream-topped super latte is so much more appealing than a bottle of water and a banana.

Like water and a banana, my bullet-pointed list is boring. But it works. It doesn't offer excitement or new insight, and this is perhaps why it fails to inspire us at that emotional level that we crave. But if I stick to it I'll get the longer term outcome that I truly want.

Any investor can stick to the list above and historically the evidence would suggest that they would have done alright for themselves. The trouble is, we start getting in our own way as soon as we start investing. When the going gets tough, what we really want is a money muffin - a sugar rush blast of intense short term reward in the form of a trading secret or a colourful narrative.

This is why, if I was forced to select just one platitude, then it would be the second on the list above. In my experience, investing with a goal in mind is a great way to tame that reckless voice in our heads' (we all have one those right?) providing a context to all of our decisions, and anchoring them in what really matters - outcomes for our lives - rather than what is flavour of the month within the financial press.

Typical examples might include:

• "I'm going to leave it a week until we find out what's happening in the Ukraine";

• "My mate works in pharmaceuticals. Apparently they've got this wonder drug coming out in a few months so I want all my investments in that sector";

• "I can save inheritance tax on my ISA portfolio if I invest the whole fund in the Alternative Investment Market - let's do it!"; and

• "It's six months until I retire but I am not going to de-risk my pension portfolio just yet - everything was higher 4 weeks ago and I just want to get back those losses".

In financial services we talk a lot about risk. But what do we actually mean? As usual, it depends on the context. As a financial planner I make a point of distinguishing between:

• Investment risk - the chance that a portfolio will fail to deliver the expected return when needed.

• Volatility - a measure of standard deviation that does not distinguish between good and bad outcomes.

Generally speaking, risk is what's left over after we have thought of everything else. It's a lot easier to deal with the risk if you have a goal in mind because you can relate the risk to the outcome. Like a lot of things in life much risk falls into the 'S' category:

C - Control

I - Influence

S - Sod all

As investors, there are certain things we can control (how much we save, asset allocation) there are other things we can Influence (the tax we pay, the costs we incur) and then there are those things that we can do sod all about (the collapse of Lehman Brothers, the economic fallout of a biological terrorist attack, Miley Cyrus).

Most of the time, issues in the 'S' category will have a marked effect on volatility, but, with the right framework provided by an evidence-based approach, they need not increase the risk to your investments.

In times of volatility, it's always tempting to reach for a money muffin. But if you've set long term goals, you'll find that there's an even bigger emotional reward to be gained from living the life you want.

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger

He writes a regular blog about behavioural finance for Private Client Adviser

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