The Top 10 Investor Errors (And How You Can Overcome Them)

Have you ever checked out the finance section of your local bookstore? That’s usually the first place I zoom into, because I’m nerdy like that. The first thing you usually see is a SEA OF PURPLE in that hugeass shelf of Rich Dad, Poor Dad books. Don’t ask me why, but the gaudiness kind of turns me off. And then there are the shelves and shelves of books on awesome investment strategies: value investing, day-trading, swing-trading, volatility arbitrage, investing in wine/land/oil/Oompa-Loompa sex slaves..

For the amount of ink that’s been spilled to write about these sexy strategies, the hard truth is that 90% of investors will never be successful at any of them, because of their own inherent biases.

Barry Ritholtz wrote this great article on the Top 10 Investor Errors which I thought I’d share with you. If you’re just starting out in investing, or are thinking of doing so, I highly recommend that you read it – it’ll put you ahead most investors who don’t have a clue about the game that is being played around them.

The Top 10 Investor Errors:

1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Mutual Fund vs ETFs
5. Asset Allocation Matters More than Stock Picking
6. Passive vs Active Management
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

At the risk of sounding like I’m under the influence of Error #8 (Cognitive errors – one of which is: “We selectively perceive what agrees with our preexisting expectations and ignore things that disagree with our existing beliefs.”), I’d like you to consider that a passive, low-cost, index-based, diversified and automatic (PLIDA) investment strategy will help you to overcome 9 out of 10 of these errors – pretty much everything except error #10 (because you don’t need to pay for a financial advisor). Check out my previous posts on investing if you need a quick refresher on a PLIDA strategy.

So how will PLIDA help you to be more baller than 90% of investors out there?

1. Investing in low-cost ETFs is – by definition – a low-cost strategy, which eliminates errors 1, 4 and 6. “Fees are an enormous drag on long-term performance… Typical mutual fund or adviser fees of 2 to 3 percent may not sound like a lot, but compound that over 30 or 40 years, and it adds up to an enormous sum of money.”

2. A diversified portfolio of index-tracking ETFs will take care of your asset allocation for you, eliminating errors 2, 5 and 7. When you’ve got a good mix of assets (say stocks, bonds, and real estate, diversified geographically), at least one of them will perform well at any given point, regardless of whether you’re in a bull or bear cycle.

3. An automatic investment strategy of dollar cost averaging, (investing the same amount of money at regular intervals while ignoring the price) will let you overcome the cognitive biases of trying to time the market, eliminating errors 3 ,8 and 9. Here, you don’t care about whether the stock market did well or whether the Fed is going to raise interest rates or what Ben Bernanke had for lunch today. You would calmly and surely stick to your strategy of investing, buying more when others are fearful (and prices are low) and less when others are greedy (and prices are high).

Meanwhile, back at the bookstore…

Go back to that finance section at the bookstore and try to find a book that’s written about PLIDA. Chances are, you won’t find that many. Not many people care to learn about the one strategy that offers them the highest chance of success. Instead, they prefer to bury themselves in their copy of Make Big Money And Retire Early By Investing With Covered Calls, and continue to delude themselves. How about you?

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Wake Up in the Morning Feelin’ Like P Diddy

Okay, you’re not the only one who has no freakin idea what those lyrics are supposed to mean (This intellectual forum discussion doesn’t really give me any clue). Oh Ke$ha, you have such impenetrable philosophies.

Of course, not many of us get up on a mattress made of cash and surrounded by hot chicks, so I guess it must be really hard to relate. Instead, the alarm clock jolts us out of an uneasy sleep on a Monday morning, we stumble out of bed, hit the shower, and commute to work surrounded by other sleepy, smelly people who are just as depressed as we are.

There’s a better way to live our mornings. Ever had those couple of things you always wanted to do but never had the time? I’m not talking about the billion things in your work to-do list; I’m talking about things that are actually awesome: Reading that book you always wanted to, exercising, watching that TED talk, spending more time with the kids, or if you’re nerdy like me: researching your investments and optimizing your credit cards.

Laura Vanderkam recently wrote an article on what the most successful people do before breakfast. It turns out that mornings are the perfect time for you to get things done – you’re more rested, more alert, have more willpower, and are less likely to be interrupted. She talks through 5 steps to getting the most out of your mornings: 1. Track your time, 2. Picture the perfect morning, 3. Think through the logistics, 4. Build the habit, 5. Tune up as necessary. Essentially, it’s pretty similar to what I’ve blogged about building up effective habits – start tiny, and then tune upwards as you get more successful.

I decided to try it out. My office is literally located in one of the most remote, desolate, and depressing parts of Singapore. Yes, it’s true. Don’t ask me why. However, one of the advantages of working at the end of the world is that I have an 1 to 1.5 hour-long commute every morning. While most people see it as a pain in the ass, I’m using it as a perfect opportunity to read, pray, meditate, or work on other projects. (Here’s a little secret – I’m currently using my mornings to work on a special project on the side, which you’ll hear about in the coming months!) I don’t try to accomplish too much – usually a couple of pages of reading, or baby steps in my special project, or one TED talk. But do them every weekday, and they start to add up. And I get to the office refreshed, inspired, and cheerful that I’m doing something meaningful in my life other than working for the man.

The number one reason why I’m able to accomplish my morning ritual: SLEEP. I try to get at least 7 hours of sleep every day so I don’t end up feeling exhausted during my commute.  (Okay, admittedly, I fail at getting my requite hours of sleep 2 days out of 5, but it’s all good as long as I fix it the following night)

So – try it out. See if it works. You never know – your morning ritual could let you wake up feeling like P Diddy after all 🙂

How To Get Rid of That Bulge In Your Pants

Yes… it’s a big one. And I confess that I walk around with it all day.

Honestly, if we could all just get rid of cash and pay with credit cards, like in this Visa ad, my wallet – and that bulge in my pants – could get a lot smaller (Insert snide comment about my manhood here). I have a love affair with credit cards – they’re compact, sexy, help you to rack up rebates, and build your credit score – which could save you tens of thousands of dollars if you ever take out a mortgage. Some people are irrationally scared of them (“them credit cards are the devil!”) only because they don’t understand how to deal with them. That’s stupid. Credit cards can totally work for you if you have a system that integrates them into your life.

So far, I’ve blogged about the essential credit card ingredients:
1. Set up automatic payments
2. Use cashback/rebate cards as much as possible
3. Limit your number of cards to 2 – 4

Today, I’m gonna talk about how to put all of ’em together into a system, so you never ever have to worry about credit card admin ever again.

The sexiest credit card system you’ll ever use

1. Decide on the single most important reward you’d like to get out of your credit card, and pick a card that offers it. We’ll call this your SEXY IMPORTANT CARD (SIC). They could be anything, but you have to pick just one:

  • Cashback – My personal fave, so I don’t have to figure out how to spend my points before they expire, and it’s like getting a discount for everything I buy.
  • Airline Miles – if you travel a lot
  • Random dining/shopping rewards

2. Channel 80-90% of your spending towards your SIC to maximize the rewards that are the most important to you. Literally try to spend everything on this card: wining and dining, shopping, toothpaste, major purchases and gifts, and Oompa-Loompa slaves.

3. Pick 1-3 other cards which will allow you to enjoy any exclusive credit card benefits not covered by your SIC. We’ll call these your AWESOME BENEFIT CARDS (ABCs):

    • 1 Visa and 1 MasterCard should work just fine for most people – I advocate having at least one of each because they’re the most general purpose and widely used, and you can take advantage of Visa-only or Mastercard-only promos if you come across them
    • I hardly ever charge anything to my ABCs. I keep them strictly to enjoy any exclusive card benefits that my SIC isn’t eligible for.
    • Don’t fall into the trap of opening too many new ABCs – read my post on limiting your number of cards.

4. Keep your ABCs active by directing a small, regular, recurring charge to each of them.

    • This could be as tiny as a monthly $5 magazine subscription. I have 2 ABCs –  I direct my $20/month phone bill to my Visa and my $100/month transport charge to my MasterCard.
    • The main idea is to keep your ABCs active – this lets the card companies know that you’re alive, which makes it easier for you to negotiate for fee waivers and credit limit raises when you need them.
    • More importantly, it builds your credit history – a long repayment history on these cards (even if it’s just $5 every month) will help to boost your credit score, as long as you pay them off on time every month.

5. Arrange for automatic payments for your SIC and your ABCs so you never miss a payment.

That’s it! This system will concentrate your spending on your SIC, accumulating rewards where it matters most to you. Your ABCs will give you the flexibility to enjoy whatever benefits that come your way which isn’t covered by your SIC. And automatic payments will ensure that you don’t have to deal with all the damn admin that comes along with paying those bills. (The only bit of admin that you do have to do is to check your monthly statements to ensure that there aren’t any suspicious charges like HOOKERS on it. But that shouldn’t take you more than 5 minutes every month)

Sexy and you know it

Credit cards are getting more general purpose these days. Visa has a wave and go option. If you’re Singaporean, some cards double up as an EZ-Link card (to my overseas friends – what we use to ride our subways/buses). We might eventually not have to use cash in the future, and be like this guy: 

In the meantime, try my system out, and let me know if it helps you out. 🙂

Why I Love Making Fun of Credit Card Marketeers

So once I started working in the big wide corporate world, I’ve been getting a lot of calls from credit card telemarketeers. And since it’ll be a couple of months before Singapore establishes its own Do-Not-Call registry, I figured I might as well have fun with these unwelcome calls when I get them:

Marketeer: Good morning sir, how are you today? Would you be interested to know about this new credit card that we’re launching?

Me: Good morning! Could you tell me what the meaning of life is?

Marketeer: …. I’m sorry sir?

Me: I think the meaning of life is INSTANT NOODLES!!! LOVELY GOLDEN STRANDS OF COMFORT FOOD COOKED IN 3 MINUTES – GIVE ME SOME OF THAT MSG GOODNESS AHHHHH!!!!

Marketeer: ;

The reason why we absolutely freakin hate these marketing calls is because we don’t need another damn credit card. Most of us cant keep track of all of ’em as it is. Also, if you’re a dude, your wallet is probably already so fat with all sorts of crap that taking it out of your jeans pocket is like a freaking arm workout.

Previously, I blogged about setting up a system to pay your bills so you can optimize your credit score, and using cashback credit cards so you don’t have to spend 2 hours each month figuring out what to do with all your points. You’ve taken the brainwork out of most of the process, but now there’s a remaining fundamental question: how many credit card(s) should you own?

Too many choices

A cursory search on Google reveals that there are 105 credit cards you could use in Singapore. And that’s for our tiny li’ll population of 5 million people. My overseas friends reading this are probably faced with an even more mind boggling array of choices. And it doesn’t help that these damn marketing folks keep pushing new ones to us all the time.

There’s actually no right number of credit cards that you should have, but if I had to cough up a number, most people would probably do very well with just 2 – 4 cards. If you’re lazy and hate keeping track of your cards like me, you should be minimizing the number of credit cards you own. Why?

Why you should limit the number of credit cards you have

1. It helps you to take advantage of all the benefits they offer: I own three credit cards and I already have trouble remembering which places offer benefits for my cards. Most people would think that limiting the number of credit cards you own would limit your choices, but the opposite is often true – the more choices you’re faced with, the less likely you are to act on them. It’s counterintuitive, but limiting the number of cards you own makes it easier to stay on top of what you’re eligible for, making it more likely for you to realize your credit card benefits.

Also, concentrating all your spending on just one or two cards reaps way better rewards than spreading them out across many cards. Which customer do you think a card company is going to reward more – someone who spends $1,000 consistently every month on it, or someone who randomly spends $37.40 on it once in awhile?

2. It helps you to optimize your credit score: Credit Bureau Singapore tells us that if you don’t have a good repayment history, opening more lines of credit could actually hurt your credit score. Also, your credit rep is built though building a long track record of credit history – you’re better off using just a couple of credit cards for a long period than opening a whole bunch of new ones.

3. There’s a whole lot less admin to do: The more cards you have, the more admin you have to do. Anyone who’s ever had a pile of unopened bills, statements and brochures pile up on your desk will know what I’m talking about. Keep things simple – eliminate the administrative fat, and you’ll have a way better quality of life without that annoying niggling feeling at the back of your mind that you have to clear that growing pile of paper at some point.

4. You spend less: The concept of less cards = less temptation is easy to understand, but having less cards also makes it easier for you to circumvent one of the most insidious tricks credit card companies use to squeeze money off you: the annual fee. These fees are easily waived, but you actually have to spot them in your statement and call the credit card company before they’d actually waive it. And limiting the number of statements every month helps you to quickly spot those sneaky bastards from secretly charging your card when your fee is due (almost happened to me before!).

So to recap, you now know the essential ingredients to set up a sexy, low-maintenance credit card system to build your credit rep and puts you on the path toward living a rich life:

1. Set up automatic payments

2. Use cashback/rebate cards as much as possible, and

3. Limit the number of cards you own

I’ll be blogging next about how to put all of these together – stay tuned! 🙂

How Credit Cards Can Make You Feel Like a Kid

What’s the most annoying part about being an “adult”? No, it’s not the fact that you can’t pick your nose in public anymore. Or that every time you walk into a Toys ‘R’ Us by yourself, parents eye you suspiciously and assume that you’re gonna kidnap someone. Or that it’s only 10pm on a Friday night, you’ve had one beer, and you’re already exhausted. No, no. To me, the most annoying part about being an adult is that there’s so much damn admin to do.

Admin. Really. It’s such a pain in the ass. Remember when you were a kid? Everything was given to you. You just had to get good grades, do your chores, eat your vegetables, and if all else fails, whine. And the entire world would fall into your lap: Happy Meals, GI Joe toys, Disneyland, Spiderman comics… without you ever having to bother where it all came from.

Annoying admin

Now, I have bills to pay and file, and a budget to take care of, an investment portfolio to monitor, and I have to check that my credit card statement doesn’t have a $2,000 charge for DONATION TO NIGERIAN PRINCE on it. There’s so much admin we do on a regular basis, we could at least hope for a hassle-free experience when it comes to claiming our rewards, right?

Wrong. So last year, I tried to redeem my reward points from my credit card. I’d spent like 10 months charging every last dollar to my card, racking up points #likeaboss and feeling really good about myself. So when I logged onto the online rewards portal to claim my well-deserved prize, I was led through a dazzling array of choices: perfume? Briefcase? Shoes? Suit? Dubious vibrating contraption you strap around your waist to help you to lose fat? Too many choices, but they all had one thing in common: they were way too expensive. If I wanted to redeem any of ’em, I’d have to fork out like another couple of hundred dollars, enter my claim, collect a voucher, go to the store, get my item, pay the difference, and complain to the cashier about their terrible customer service. When it comes to rewards, I don’t want to have to go through a whole bunch of annoying admin just to claim it. I sometimes think that the credit card companies make it ridiculously hard to claim anything just so you’d give up.

Cash is King

There’s another way to maximize the returns on your credit card without you ever having to do any annoying admin. It’s called a cashback (or dividend) card. These cards are straightforward, transparent, and best of all, don’t require any effort on your part to enjoy its benefits. And you know I love anything that doesn’t require effort, because I’m lazy as hell.

Cashback cards work like this: Every time you charge something to your credit card, a certain percentage gets credited back to your account as “cashback”, which will help to offset your total bill. Think of it as having a discount on everything that you spend on. I’m a pretty big fan of the StanChart Manhattan card, which gives me a cashback of 0.5%-5%, depending on how much I spend every quarter. I literally charge everything that I possibly can to it to maximize my cashback. I’d charge my daily $0.65 cup of coffee to it if I could, but I think the coffee shop owner would yell at me. And every quarter, I get a huge discount on my credit card bill in the form of cashback. It’s like finding free money.

0.5%-5% of your bill doesn’t sound like a lot of money, but add that up over the year and it’ll possibly be the same, or higher, value as the “rewards” you redeem from the usual reward cards, except that this one doesn’t require any effort on your part. If you drive and dine out a lot, the Citibank Dividend card is a pretty sweet deal too.

Feelin’ like a kid

I’m not saying that other types credit cards are bad. If you’re the type that likes to shop, and visit the hellish, sardine-packed places they call “malls”, then rewards cards have their place. Or if you travel a lot, then a card that racks up miles may be a good option too.  But for people like me who hate admin with a vengeance, a cashback card offers the simplest, easiest way to have money falling from the sky into our laps. It’s like feeling like a kid again.