Can the lazy investor outperform the proactive and aggressive in building wealth in today’s highly volatile investing landscape?

Has your investment strategy ever failed you? How did you know that something was wrong? How long did you take to correct it? I’m going to tell you about my biggest investment strategy failure today!

Best Years

As a professional in his late twenties, I’ve realized the need of saving and investing to grow my hard-earned money. I was getting comfortable at my job and had some quality time to research investing. Also, I have started saving investible cash from my employment income. So, I decided to invest in stocks, real estate, and gold. The economy was booming and my trading portfolio did really well. Land values, as well as gold, have been appreciated in short periods of time as well. Whenever there were 15% or more profits, I cashed them in. It felt like I’d found the perfect investment formula to get rich! What a sweet feeling it was during those 2 years when the portfolio value doubled.

But, it didn’t last long. The economy started slowing down and the interest rates spiked causing the stock market to plunge to five-year lows dragging my portfolio with it. I exit at losses to stop further losses, as market recovery was not in the vicinity. For worse or for good, I got a promotion at the job and got much busier. And couldn’t spend time in investment research or look for leads on potential properties to buy. First, my portfolio value went down by a good 30%, and for the next few years, it stagnated.

I’ve been earning higher and accumulating savings but was not allocating them to investments efficiently. I couldn’t believe what happened to my portfolio during the best years of my life!

What went wrong?

It took me years to clearly understand what went wrong. I thought it’ll be good to retrospectively look at how the value of investments moved from months to years to decades for a better understanding.

1. Riding the rise

I was enjoying the profits in the first few years by buying when the prices go down and selling when they go up. Since I couldn’t guess when to exit with the optimum profit, I existed when an investment made more than 15% to 20%. Honestly, I didn’t know that this cool uphill ride was just the beginning of a bigger rollercoaster ride.

2. The great fall

Then came the great fall where the value of investments went down drastically along with the negative market sentiments. Note that the profit cycles shown in the previous graph were just micro-events in this cycle that runs from a few years to a decade. While the markets are in your favor, profits soar, and during the market crashes, losses accumulate.

3. A sine wave steadily going up!

It wasn’t news to me that the market value of stocks varies over time and it follows a sine wave while going up steadily. Personally, it was an eye-opener that I was stuck in a tiny part of the market cycle happily completely ignorant of the big picture.

Profits and losses cycles and the associated emotions were eminent if I was to continue my investing behaviors. It was a call for a change! So, I started talking to a mentor and explained what went wrong. He summarized my problem:

1. You are a professional on a full-time job, you have limited time to research and make investment decisions. So, you should align your investment strategy that needs minimal time and energy to enter, maintain, and exit.
2. You have used a strategy called momentum investing and it’s a good tool when you can identify such momentums and are wise enough to get out on time. Momentums are temporary and it’s statistically impossible to maintain positive margins from trading (buying low and selling high) consistently as you cannot predict the market behavior accurately. It’s a highly risky game where people are prone to significant and unbearable losses.
3. You didn’t have goals that needed cash every now and then. Yet, you’ve cashed in profits too often and missed big returns that came long term. For e.g. you’ve got about 20%-30% returns from gold within a year. But, you’ve missed 100% gains that came in another year later.

He recommended what he called the “Lazy and boring approach to invest” which is based on value investing that has been extremely successful in making average investors produce beyond average results beating 90% of the market with just 10% of the effort. Today, this is the investment approach that we primarily use in our coaching sessions for busy professionals who are investing for long-term goals. What we are about to discuss sounds too simple and boring. But is highly efficient and effective in the long run and statistically proven.

A lazy approach to invest

What would you do, if you were lazy to make investment decisions? Let’s discuss a few things that you should be doing and avoiding.

1. Go as long-term as your end goals

Aligning investment outcomes to your life goals is very important. Otherwise, it’ll be just building wealth for no reason. e.g. If you invest for your retirement in 20 years, you’ll aim for much higher returns in the range of 1000% — 2000% in 15–20 years instead of 20% — 30% returns every year. Property closer to an upcoming 10-year major city development project with a 2000% return over 15 years could be preferred over a property that you could flip and make 30% within a year.

Here we are utilizing the true and innate power of the compounding effect of assets. Stocks of good companies and valuable properties continue to improve their value, in the long run, irrespective of varying market sentiment in the journey.

2. Pick investments that do not need a lot of analysis and research

Before putting your hard-earned cash into an investment, you should be comfortable with your decision. For that reason, one should do the required level of analysis and research before making an investment decision. But, if you are broad-basing your portfolio to get the benefits of the overall asset appreciation over time, exchange-traded funds (ETFs) and other index funds may be preferred over picking individual stocks. Using REITs or shares of listed property companies may be preferred over owning real estate individually. But, you could pick investments that you are familiar and comfortable with. For e.g. I had a few blue-chip tech stocks in my portfolio that I was already familiar with, owing to my professional background. Also, I have invested in scenic properties as I loved them and had a good eye for them.

3. Avoid Reacting emotionally to market movements

Human genetics are hardwired to immediate results and wanted to run away from danger as those are critical survival instincts that made our ancestors safe. The most difficult part of lazy investing is resisting the urge to cash in profits and wanting to run off when markets crash. When greed and fear emotions come to play, it’s proven that we make worse results.

The below table shows how our emotions direct us in typical market behaviors and how we should respond intelligently.

4. Start Small — Invest Gradually

You’ll pick investments that you can continuously pump in your savings monthly or quarterly basis with the least amount of additional effort and analysis. Try to avoid pouring a lot of your savings at once! One advantage of going long-term and growing your portfolio gradually is that you can course-correct at the least risk. When you start small and invest gradually, not only do your investments grow over time; your knowledge, experience, and confidence grow with it. Consider automating fund transfers from your earnings to these investment accounts regularly.

One strategy that my mentor follows is buying stocks with a “Never sell mindset” where you continuously buy small amounts every month when the stock price is within the worthy valuations according to its fundamentals. This dollar-cost averaging method is statistically proven for buying at optimum prices minimizing the risks that may arise in the long term.

5. Reinvest Gains & Rebalance

Rent from real estate or dividends from your stocks can be reinvested to improve the compounding effect of your portfolio.

You shouldn’t expect to see huge differences in your portfolio performance over a few months. But over a year to two, there may be changes, so it’s very important to rebalance your portfolio. These rebalancing decisions should be based on the long-term changes in asset fundamentals and their potential and not the market sentiment. For e.g. You don’t sell AAPL (Apple common stock) if there is a dull year for their iPhone sales. But, you get rid of shares of companies that lose market share and failed to innovate.

Final words

Think of a lazy portfolio as planting a mango seed and giving it enough time to grow into a massive mango tree. As each season and year pass by, leaves fall and branches break off, but the tree will grow slowly. One day it’ll bear fruits and most years you’ll be able to enjoy them. As the tree grows bigger and stronger, it’ll not need a lot of your energy or attention.

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Written by Lilan Priyashantha