Friday, November 23, 2012

My Investment Plan - Index and Ignore

The last few times I've set up investment accounts at TD I've had to sit through their "Investor Profile" quiz. I imagine most banks do this, too. They ask you a series of questions to see if how you think of yourself in terms of investing matches how you'd react to certain situations. For example, if you say you want a highly risky, all-stocks portfolio, but couldn't stomach a 5% loss in a year, then you're inconsistent. If you are consistent then they will recommend a portfolio that better matches your true risk tolerance.

However, if your plan is to stick to a certain asset allocation year after year, not changing it for any reason, they have no clear way to accommodate you. As I recall it, there is yet another form that explicitly absolves them of any differences between your answers and what you do with your money. It's all about identifying potential liabilities in the form of people whose portfolios don't match their risk tolerance. The assumption is that everyone needs help investing from the mutual fund salesperson. Oh, did you not realize everyone in the branch is a salesperson, including the tellers? Opening an account gets someone some money, and getting you into specific mutual funds is very valuable.

Doctors don't scan your thyroid for potential cancer activity because there is so much weird stuff in thyroids that there's no point in acting on the findings. And so it goes for index investing. My plan is to follow a strategy of investing in very low cost index funds, rebalancing to a particular asset allocation yearly with a net deposit. This is called couch potato portfolio investing because it involves so little effort. I pay no attention to what's going on with my money because there is no information on which I would act. Up 15%? Whatever. Down 30%? Don't care. (Actually, if I knew this I'd pile in more money because it's like stuff's on sale.) Index investing addresses the two biggest impacts to investing: 1. the fees in the form of the management expense ration (MER) and 2. the damage done by investors selling when things are low and buying when things are high.

As a math geek I can envision myself tracking the daily value and yearly return of my (still small) portfolio, just because I know how. However, the information is as meaningless to me as the standings in the NFL. I'm happy to let that which doesn't matter truly slide, as Tyler Durden does.

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