Canto 11

Three Simple Rules

Having written enough other cantos to provide the background for these, I'm now going to talk about the Bank of Dad's three simple rules of investing.

1. Don't Worry Too Much About the Details

With the exception of costs (see rule #2), it's not worth worrying too much about which specific funds you put your money into. The biggest difference in how much money you make from your investments comes from the types of investments you choose, not from the specific investments. Look back at the discussion of asset allocation. If you look at the variation in results among a group of investors, 90% of the difference comes from their decisions about how much they each put into stocks, bonds, or cash type investments. Decisions about which specific stock fund to use only account for 10% of the differences.

One really good reason not to worry too much about the details is that you can suffer from analysis paralysis. Confronted by a vast sea of mutual funds and ETFs offered by numerous companies, you might just not do anything at all and leave your money in your savings account. If you have decided that the time is right for you to invest (see the discussion on whether to invest), then you need to get going. Otherwise, inflation will eat your lunch.

2. Pay Attention to Costs

Canadians are too passive about how much their investment managers charge them, often for services they don't use or need, and sometimes for no value at all. Costs are a detail you should worry about. Don't pay more than you should. See the discussion on costs for more about this.

3. Don't Obsess

Once you've got your money invested, don't pay too much attention to it. I look at how my investments are doing once a month. I typically move things around a bit to rebalance the portfolio once a year. Sometimes ten years will pass before I ever move money out of an account. Don't be a day trader - be a decade trader.

If you've made good choices about asset allocation and you've paid attention to costs, you should be able to park your money and let it ride. This will minimize the costs (to you and/or the fund company) of frequent trading, and it also minimizes your time investment. Your time is valuable, too, so get things set up and then go do something you enjoy.

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