The best plan is the one you can stick to.
There are so many similarities between successful investing and staying fit and healthy. Both are really simple in theory, but really hard in practice. They are hard because they both need a really important ingredient – discipline. There isn’t really a holy grail to either endeavor. It's just about picking a plan and sticking to it. But what I have realized is that a suboptimal plan that you can stick to is better than a great plan that you can’t stick to. There are thousands of different diets out there, and no one really knows what the best one is, but picking the one that works for you and that you are able to stick to is better than trying to find the perfect one. Likewise, there are thousands of different exercise options out there. I have been doing CrossFit for four years now – I have found a trainer I love and she keeps me disciplined. I tried to get my husband into CrossFit too. He went for a month or so and then stopped. It wasn’t for him. He has since taken up running, which I was very dismissive of (despite the fact that I spent ten years of my life doing nothing but running). I kept telling him how much stronger and fitter he would be if he stuck to the CrossFit. But this was just me projecting MY perfect plan onto him.
What I have since realized is that if running works for him and he sticks with it, then he will be far fitter and stronger than he would be if I keep nagging him about CrossFit and he never goes!
And so it is with investing. You can set up the perfect investment plan while the markets are going up, but if as soon as the markets turn, you panic and abandon the plan, then it is useless. Unfortunately, this is exactly what many investors do.
Morningstar has started publishing fund returns alongside investor returns. That is, they adjust the fund returns for the timing of cash flows to give an indication of the return that the average investor made in the fund. Looking at the Vanguard 500 Index Fund is particularly revealing. This is one of the lowest-cost index funds out there – it gives you exposure to the largest 500 companies in the US for next to nothing. No one could argue that investing in this fund is not a good plan. The return of this fund over the past ten years is 10%, and the average investor in this fund made 5%, exactly half that return.
What happened you ask?
Well, instead of buying the fund, sticking it in a drawer and forgetting about it (which should be the plan), investors bought it, then sold it, then bought it again….and so on. They made the wrong decisions at the wrong time – they sold the fund when it fell and bought it when it rose. There was no discipline. And so the great plan ended up giving mediocre results.
Going back to exercise, I use a trainer because she keeps me disciplined and accountable. She can't actually do the workout for me, I have to do the work, but she is there encouraging me, motivating me, keeping me going, correcting me. She helps me stick to my plan. I could save myself some money by simply going to the gym, but I KNOW that by working with her I am FAR stronger and fitter than I would be if I was left to my own devices. Really, a good financial advisor is no different. The value is not about in picking the best investments, but in helping you create a plan and then helping you stick to it.