Psychology of Investing: 4. Keeping your Hobby in its Box

About the psychology of investing series

This post is designed to be a companion to our main ‘How-to’ investment guides. If you haven’t read them already, I recommend you check them out now:

These are the core of the free investing courses I offer on this site. But on their own – they tell only half the story. The investing course content will provide technical competence, but they won’t provide mental competence.

They won’t arm you with the tips and tools to overcome the stress and psychological challenges that come with investing.

I’ve written articles about whether now is a good time to invest in the stock market, when investors should buy shares and when is the right time to sell shares. The popularity of those articles in particular, leaves me with no doubt that indecision and insecurity drive our investing decisions – whether we want them to or not!

Don’t fall victim to chance

If you’re investing a great sum of money, this brings a lot of pressure. In that circumstance, I’m not surprised that people look for confirmation of their investment decisions in the media.

That leaves their investment decision to chance – because which articles you happen to find is a matter of luck, not scientific research.

I’ve witnessed several occasions where financial journalists have produced two articles in the space of a week that argue for completely different investment choices. One is bullish and one is bearish.

To begin Googling whether to invest in x or y, is to roll the dice because you don’t know which type of content you’ll find. This is just a single example of how human psychology (the need to move in step with others) can make or break a portfolio.

To create an investment strategy that you can stand behind for decades to come, I think you will greatly benefit from greater knowledge of investment psychology.

This psychology of investing series will comprise six bite-sized articles which will each focus on a single problem (a stressor) or a solution (a mindset). I hope to challenge your views and encourage you to reflect upon how the stresses of investing affect you, and how your portfolio can be protected against negative urges.

Keeping your hobby in its box

When I first began investing I didn’t gently wade into the stock market; I fell in love with it. I read book after book and immersed myself in all aspects of the pursuit.

It wasn’t before long that I had more investing ideas than I could possibly put into action.

This had its drawbacks. This is a cautionary tale of what happened when I failed to separate my investing from my passion. When I didn’t keep my hobby in its box.

So many ideas and yet so little capital

With a basic understanding of the science of diversification, I figured that the more investments I tried, the wider I would spread my risk. If that’s the case, then why not try a bit of everything?

In addition to shares, I added preference shares to my stockbroker account. On top of real estate investment trusts, I experimented with things from direct property ownership to investing in emerging markets. Essentially everything except investing in Bitcoin.

In addition to shares, I added preference shares to my stockbroker account. I also experimented with direct property ownership and real estate investment trusts.

Complexity isn’t the objective

After two years of investing, my portfolio was a sprawling web of accounts.

While this did help avoid specific risks of any one platform failing, it wasn’t quite the type of diversification I needed.

To build a robust investment portfolio, you should first choose an asset allocation and then spread your money across at least 25 individual securities (i.e. shares or bonds) in each asset class.

In theory, this can all be achieved with a single account. Within one account, you can invest deep into an asset class by choosing more investments of the same type.

Instead, I invested shallowly – scattering funds far and wide across completely different types of investments.

With complexity comes fees

The issue with me investing £1,000 here, there and everywhere is that I began to rack up account charges and investment fees.

Each platform usually carried an annual charge. For large investments, this would have been an affordable % of assets. But for smaller amounts, it would be a flat fee which represented a much higher %.

These would then stack up for each account I owned. Rather than reducing my investing costs, I accidentally caused them to skyrocket. I was paying 5 platform fees, and multiple trading fees every month.

All these fees were eating away at my returns.

Keeping your investments at arm’s length

Let’s consider the alternative. What could I have done better? What if instead of racing into every exciting investment, I invested as if investing wasn’t my hobby.

I could have placed all of my funds in a single stockbroker account, and split it between three asset classes; Equities, Bonds, and Property. Each asset class could have been represented by one exchange-traded fund.

This would have incurred:

Keeping your hobby in its box is about keeping your portfolio simple, and trimming costs. Your returns will increase, which counter-intuitively means that you may best serve your inner desire to save and invest… by doing a lot less saving and investing!

Keep reading: The full Psychology of Investing Series:

  1. How to Accept Losses
  2. The Income Mindset
  3. The Dangers of Exuberance
  4. Keeping your Hobby in its Box
  5. Auto-Pilot Investments

Keep reading

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