When I started investing back in 2011, I’ve never really asked myself what is my goal in investing. Maybe it’s because of the mechanism that people often talk about that beats inflation over time. Or maybe it was an opportunity of one’s lifetime for an escape from the reality of working in a rat race corporate environment. The herds would probably say they are in the market to earn a realistic long term return that beats inflation over time. But we’ll never know whether that’s their true intention or not.
I was reading a couple of letters written by Howard Marks about certain objectives of investing and came across one which I thought was worthwhile to ponder.
In his letter, he presented a two-by-two matrix regarding certain investor’s behavior and the possible outcomes. I have appended the table below for our easy reference.
Dan Ariely, who is a professor in psychology and economics behavior and also authored the book titled “Predictably Irrational”, commented that human’s behavior tend to be self herding and crowd herding. By self herding, it means the tendency to follow the same decisions one has made in the past. On crowd herding, he asserted that humans like to follow what the crowd is doing and if possible, should not be left to make any decisions.
Now, back to the above table, it appears that for those herds whose objective of investing is to earn an average return that beats the inflation rate over the long run should fulfil 3 out of the 4 cells of the matrix presented above. This can be done rather directly through dollar cost averaging on an index which many have in fact done the opposite and participate in stock picking instead. When we sit down and ask ourselves again reflecting our goals in investing, they have surprisingly move a scale upwards from being an average performing to outperforming the market. That’s really weird somehow. It goes the same for myself.
In one of the quotes from David Swensen, who administered the famous Yale endowment fund, he said:
“Establishing and maintaining an unconventional investment profile requires an acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom”
The idea to the above is that non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Non-consensus decision by itself tends to be lonely and in pursuit of achieving an above average return, one must be daring enough to look failure as an acceptance.
Failure as an acceptance
A couple of fellow bloggers have talked quite a bit in the last post about giving failure itself a chance to succeed. I really appreciate their comments because of the experiences they have gone through.
Many of us when asked, has never considered failure as an option or acceptance. The honest truth is failure isn’t anyone’s goal to begin with, but rather an inescapable potential consequence of trying to do really well but fall from it.
In investing, any attempt to achieve a superior above average results has to entail acceptance of the possibility of a failure. The matrix appended above showed exactly that. In the course of trying to be different from the herds, one has to bear the risk of being different from the other. This can apply to many things in life.
Now, consider the below symmetry scenarios which we often hear some arguments about.
1.) If you invest, you will lose money if the market declines.
If you don’t invest, you will lose money through inflation over time.
2.) Market timing will add value if it can be done correctly.
Buy and hold will produce better results if timing can’t be done right.
3.) Aggressiveness will help when the market rises but hurt when it falls.
Defensiveness will help when the market falls but hurt when it rises.
4.) Portfolio concentration will kill the portfolio in case there is a mistake.
Portfolio diversification will diminish the portfolio in case there is a success.
5.) If you employ leverage, your successes will be magnified.
If you employ leverage, your mistakes will be magnified.
Now that you’ve seen this, can you answer this affirmatively? What is your goal in investing?
Hi B,
Good question 🙂
My goal is simply to beat inflation and make sure that my savings won't be eroded over time. That's the primary goal. The secondary goal, which is also linked to the first, is to use the stock market to create a stream of income and become my financial asset which will be used to replace me when my human asset gets weaker over time. This will generate passive stream of money so I can work lesser and at my own pace.
Hi LP
Thanks for sharing on your goals. I think they are very similar to what many of us are here but you have it very concise and clearly you know what you need to do to achieve that. I wish you nothing but the best in achieving your goal 🙂
Hi B,
The goal is very clear for me. To able to have a reasonable retirement. I aim no early retirement, maybe a slower pace at 55, and and work to be only a option when I am 66.
If it gets better than that, I am really happy, if not, I think I can live with a lesser rich life.
A supplement to CPF, the second tap to income, and my endowement policies for some little indulugences.
I am quite clear what I want.
But I am now quite sanguine about achieving it or not.
HI SI
That's an interesting goal there.
I can already see how much you are enjoying your career and it appears that the road to investing is more for your future retirement funding than anything.
It's nice to see people knowing clearly what their goals are and work towards it.
My investing goal on Jan 2000 when I became serious to use short-term trading and long-term investing strategy to become financial independence.
May be I was naive at that time to believe Rich Dad. Poor Dad. LOL!
Read? My investing goal but was late by 1 year+
Hi Uncle CW
When I started investing, I used to have that thoughts because capital was small and there's literally nothing much to compound over the years. My goal has moved forward with time now that capital is more than before. At some part, the goal is to preserve capital more than growing them.
B,
Have you noticed you have done not too bad without a "clear" investing goal from the very beginning?
Hi SMOL
I'll attribute it to luck more than anything in our bull environment.
If I can repeat the same during market correction or recession, that would be a different skill 🙂
Hi B,
A very good question. I think I have a goal but I don't have a SMART goal. If time permits, I will like to give it some thought. 😉
Hi Derek
That SMART goals to work towards is an interesting topic to ponder about 🙂
Hi B,
I wish to be able to retire when I'm 32 (>7yrs from now). But because i may be getting married and getting a house in the next few years, it would dampen the goal. Hopefully i can still achieve somewhere around there.
Hi investing wolf
Wow, that's a very lofty ambitions there.
I used to have a very high ambitions like you when I was younger but found out that things are much harder once you have settled down. Don't overstretch yourself in trying to achieve that goal 🙂
Hi B,
Thanks for sharing your observations. To be honest, I never had a consistent investment goal in my first decade of working life. That is because as new information emerges and circumstances change, I adjusted my goal accordingly.
Not an abandonment of the pursuit, but a recalibration of the speed.
Hi SRSI
Agreed on your take there.
I think goals can be shifted as we move along and they should be one which is reasonable but yet difficult enough to achieve.
Investing is something we plan to do over the next one to two decades so let us have SMART Goals that also stretch that long. We need periodic reviews or at least once a year to check whether we need to revise or change our investing strategies to stay on course towards our SMART Goals.
I still think Investing is a Game of Strategies. We need to review, revise, plan and respond to ever changing movement and moods of the market.
Sing alone to the Smurf's tune.
La lah la la lah, lah lah la la lah….
Lol @ SMOL 🙂 🙂
My goal is to get to $1 million by the time I'm 45, so that I have some flexibility in how I spend my time between family, work and other pursuits.
Dan Ariely's book is fascinating in many ways, and that table is a very interesting way to highlight the trade-off between following the crowd and trying something different – definitely much more variation in the potential outcome if you deviate from the crowd, but probably a greater life experience whether it's positive or negative!
Hi Jason
Thanks for sharing your goals.
I think you had a clear goal of what you would like to achieve in near mid to long term. It's definitely a good exercise to remind ourselves again what is our true objective in investing.
Dream Big!
🙂
Big Goal!
Possible as investors!
LIKE!
🙂 🙂 🙂
Hi Uncle CW
Achievable as retail investor 🙂
You have proven to us the real thing.
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