How to Start Investing: Part 3

Happy Financial Literacy Month! Welcome back to MintLife columnist Matthew Amster-Burton’s three-part series on how to be a great investor.

Week 1: Before you invest
Week 2: The secret of great investing
Week 3: Staying in the game

In addition to this column, I write a food blog. Sometimes. Let’s see…it’s currently April, and the last time I updated my blog was in November.

This makes me a lousy blogger, but a pretty good investor.

In the first two weeks of this series, I explained what you need to do before investing (get out of debt and read a good book) and the key to being a great investor (save a lot and keep it simple).

This final installment is about how to take care of your investments.

More cat than dog

Assuming you’re using low-cost index funds, your investments are more like a self-sufficient cat than a cuddly puppy.

They need to be fed regularly (keep contributing, preferably by automatic paycheck deduction) but don’t need more than an annual checkup to stay healthy.

Neglecting your blog for half a year is bad for your blog. Neglecting your investments for a year a time, on the other hand, is good for your mental health and your account balance alike.

Why?

Because checking up on your investments regularly is painful. Investments lose money. Often. Losing money sucks.

Even if you are confident of your investment plan and the quality of your mutual funds, seeing your balance drop hurts.

That’s why, as Larry Swedroe says, “The less frequently you check your portfolio, the more likely it is that you will be able to adhere to your investment plan.”

Swedroe should know: he’s the director of research for Buckingham Asset Management and author of many investing books, including Think, Act, and Invest Like Warren Buffett.

Write a letter to yourself

Sometimes, you’ll lose a lot of money. There’s no real way to prepare yourself, financially or emotionally, for a crash like 2008-09.

As Timothy McCarthy puts it in his new book The Safe Investor:

“The lessons we learn, and the lessons we rarely forget, come not from listening to long lectures, or thinking rationally about what we heard or read. The real valuable lessons come from either experiencing financial pain firsthand or witnessing others’ mistakes. Those lessons never leave the cortex.”

Well, that’s not promising. In rough times, however, you can turn to the advice of someone you trust more than me: yourself.

You can write what’s called an Investment Policy Statement with detailed instructions about your investment philosophy and priorities and what funds to buy in which accounts.

That’s great, but most people have about as much interest in writing an IPS as writing a term paper.

Instead, you could write yourself a “Hey, stupid!” letter:

Hey, Stupid!

You’re a long-term investor. You know the scary/exciting thing that’s happening right now?

The one that makes it feel like it would be a really good idea to get out of the stock market/flip houses/invest in risky ventures/put cash under a mattress?

Well, a couple months or years from now you’re going to feel like an idiot if you do any of those things.

So how about sitting tight, ignoring your account statements, and thinking about this again next year?

Sincerely,
Yourself

Bring it out as often as necessary. Put it on a post-it and stick it to your monitor. Have it engraved on the back of your phone. Whatever it takes.

Nudge the steering wheel

There are a couple of exceptions to the “ignore your investments” rule.

You may find that your investments don’t fit your risk tolerance.

If you’re heavily invested in stocks and simply can’t stop checking your statement and banging your head on the desk on down days, your portfolio is too risky.

That’s not a personal failing. Make a minor adjustment and reevaluate your feelings in a few months.

Once a year or so, rebalance your portfolio.

“Rebalance” is one of the most intimidating words in finance, but all it means is to set your portfolio back to the mix of stocks and bonds you chose when you first got in.

For example, say you want a portfolio of 60% stocks and 40% bonds. After a bad year for stocks, your portfolio shifts to 55% stocks and 45% bonds. So fix it.

Sell some bonds and buy stocks until you’re back to 60/40.

Sometimes this nets you more cash and sometimes it doesn’t, but the reason to do it is to make sure that your portfolio always reflects your approximate risk tolerance.

I generally rebalance in spring after doing my taxes. In fact, I’m due.

As for updating my blog, well, I’ll get around to it.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

Source: mint.intuit.com