Keeping your costs low is a simple way to improve your chances of achieving your investment goals. If you want to try to beat the market, then tilting your portfolio to risk factors, such as value, value and momentum, which are known to have outperformed over the long term, should also help to maximise your returns.
But the problem is that you can keep shaving basis points off your costs, and you can know your Fama-French Five-Factor Model inside out, but if you don’t control your own behaviour, you can kiss goodbye to any hopes you had of a truly successful investment experience.
The secret is to tune out the noise — to ignore the doom-mongers when markets start to fall and to keep a level head when they reach dizzying new heights. It’s about not being seduced by the financial media and the marketing departments of big financial institutions into buying this or that.
It sounds easy, but it isn’t. Human beings are very social animals. We like to do what others are doing, and we’re prone to a wide range of behavioural biases that make us extremely susceptible to persuasive narratives. We are, in Benjamin Graham’s famous words, our own worst enemy.
For me, this is the Number 1 reason why most investors are better off paying for the services of a financial adviser. Someone who really takes the trouble to get to know you and work out what makes you tick. Someone who understands where you want to get to, and the self-destructive thought processes that are likely to get in your way. Someone who can keep you on an even keel, who’ll listen to your hopes and fears, and who isn’t afraid to disagree with you. Someone, in short, to help you tune out the noise that bombards investors every single day.
Dimensional Fund Advisors has just released a video which makes this point effectively. If you find it useful, please share it with others. If this one thing investors need to understand the importance of, it’s this.
ROBIN POWELL is the editor of The Evidence-Based Investor. A freelance journalist, he runs Regis Media, a specialist content marketing consultancy for financial advice firms, and is Head of Client Education for the UK-based financial planning firm RockWealth LLP.