Tuesday, May 4, 2010

Passive Investing - Is It Really So Difficult?

I have always struggled with the thoughts of passive investing versus active management of my portfolio.

Today, I came across a quote by Oscar Wilde:

"To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual."

I am pretty sure he didn't have investing in mind when he came up with this line. Nevertheless, it does seem applicable even when it comes to the field of investing.

Forever Portfolio?

Too often, we find ourselves trying to time the market to buy at the lowest lows and selling at the highest points. We screen through the entire universe of stocks to find a few stocks that meet our criteria, only to sell them a few weeks later when their price has risen by 10 to 20%. We are left with nothing to invest in and end up lowering our criteria to buy stocks that we would not originally buy or end up just sitting on a pile of cash.

Sometimes, we get caught up with all the hysteria that seems to surround us. People are talking about how much money they made within a few trades and we start to look at our own portfolios and wonder : "Is Buffet really right?"

Passive investing (if I can so term it) is really difficult. To buy and hold for the long term without tinkering about too much can be extremely difficult especially when we are constantly bombarded by all the noise and distraction of the crowds.

Sooner or later, we start to find it impossible to resist the urge to make that phone call to the broker or to simply click the button on our online brokerage accounts that reads "Confirm order".

I know many people will not agree with passive investing. Many people out there have claimed to have the ability to time markets to perfection such that they have been able to make spectacular gains that are not possible by a buy and hold strategy. Of course, there must be some selection bias as the losers will never reveal themselves. Only the winners get boasting rights after all.

On the other hand, we should not find excuses if we are simply too lazy to monitor and tweak our portfolio such that we term it as passive investing or the Warren Buffet style. I am sure even Warren Buffet tweaks his portfolio every now and then!

Symptoms of a compulsive investor

Here are a few symptoms that shows you are toeing the line and moving towards a gambler mentality versus an investor mentality. (Deep down inside, human beings all like a little wager)

1. You scan the newspapers, online forums and chatboxes for the latest tips on which stocks to buy. You follow the opinions of experts and get in and out of the market at rapid pace.

2. You buy a stock and only start to do your research on it after you have completed the order.

3. You buy a stock and start to think whether you should contra it off within the next 3 days.

4. You buy a stock and keep checking its stock price every hour, hoping to make a quick buck.

5. You sell a stock and hope that it drops to a certain point so that you can buy it again.

6. You don't know why you bought a stock.

7. You don't know why you sold a stock.

I am sure you have all experienced the "symptoms" once in a while in your lives.

Preventing the onset of the disease

Prevention is better than cure. I would like to suggest a few methods to cure you of this ailment if you do suffer from it. Of course, I do not take responsibility if you lose any money.

1. Don't read the newspapers, forums and chatboxes for your stock purchases or sales.

2. Don't make a trade when you are angry.

3. Don't talk to others about investing.

This 3 strategies ought to keep y0u from making compulsive buys and sells. I realised that when I read less about the stock market, I tend to make fewer trades. When I am angry, I try not to make investment decisions and sometimes, the decisions I make can be rash. When I talk to others about investing, it always gets me excited and I feel like making a trade right away. All these are based on my personal experience.

I am not saying that you should not actively manage your stock portfolio. What I am against is the compulsive urge to tweak your portfolio so often that it is almost akin to gambling. But with all the media influences we get, it is very difficult to sit down and do nothing.

Doing nothing is a very difficult thing indeed.


  1. Try fishing. You learn how to do nothing other than watching the tides.

  2. Just do your own analysis and make the decision accordingly. There is no need to bother on how the market react.


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