In addition to this self-generated paper swamp are those materials others are kind enough to send us, among them numerous investment books. Some of these are simply thrown into large cardboard boxes; the better ones are piled two deep on the few shelves we have (it seems no one told the office designers that the paperless future was merely a fantasy of the management consulting industry). It recently occurred to us that perhaps we should do more with this mine of information we have at our disposal, which is why this week we’re launching a regular book club. Every few months we’ll take a theme and pick out some of the best books that explore it, starting with a look at behavioural economics. It’s a good subject to kick off with, as no matter how much financial information you analyse to form an investment decision, if you can’t overcome your cognitive biases you will fail as an investor.
One bias that we at the IC don’t particularly want to overcome is our long-term focus. This is the essence of our cover feature this week, which explains how to build an equity core to your portfolio that you never have to worry about. This is important, as our dive into behavioural economics reveals that checking up on your investments too frequently can lead to overtrading and underperformance. A widely held view in investing is that staying invested rather than dipping in and out of the market will produce better returns – time in the market rather than timing the market.
Not everyone agrees, however: one IC reader, a City professional, wrote to me dismissing this concept as “theoretical flatulence” and suggesting that missing down days was much more important – on the basis that if you lose half your money it’s a long way back to square one. Personally I think there is room for both views, because - as book club reveals - there are few absolutes in investment. Compounding reinvested dividends on shares held for a long time is a proven foundation to spectacular returns. But portfolio pruning - on the basis of proper research rather than panic selling - is a sensible way to make sure paper profits ultimately become real ones.
