09 Aug Investing is like going on holiday
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I always look forward to August. Not because I’m going to be away (apart from a roasting long weekend in New York last year, we tend to do that in July) and not because of the weather (I was once snowed on in the Lake District in August). It’s because everyone else appears to go away in August. My visits to the office in London are therefore considerably less crowded. Given how grim it is on a packed train, this represents a definite benefit – call it a diversification play if you will.
Anyway, as most of the UK Is seemingly about to go on holiday, I offer you the cautionary tale of two individuals who did just that. One of them had a fantastic experience and returned well rested and ready to face the ongoing challenges. The other had a terrible time and ended up stressed and in need of, well, a holiday.
Sarah rented a cottage in the south-west, near to a beach. Gerald opted for a week of hill-walking and camping in Wales.
Gerald tends to do things at the last minute and a bloke he’d met by chance told him about how exhilarating it was to be up in the hills in peace and quiet with the freedom to go and stop wherever and whenever he wanted. The person who told him about it was very enthusiastic and recommended the provider he used very highly. Unfortunately, by the time Gerald got round to booking, there were no free slots there so he opted for a different company altogether, at higher cost. Knowing nothing much about either the area or the activities planned, he didn’t ask any questions and assumed that everything would be fine. After all, the brochure looked attractive, with clear skies and epic views and the promise of invigorating walking followed by pleasurable evenings getting to know his companions.
Unfortunately, reality turned out to be less appealing. It rained (as will be unsurprising to anyone who has either spent much time in Wales or was paying attention in their school geography lessons) pretty well every day. Experienced walkers expect this and equip themselves accordingly with breathable fabrics so that perspiration escapes rather than condensing on the inside. Unfortunately, the protective clothing which he had hired when he arrived was cheaper and wasn’t breathable, his boots gave him blisters and the tent was about as waterproof as a net. To compound his misery, he didn’t get on with the other people and worst of all he also discovered that he hated hillwalking.
Being in approximately the same area of the country, Sarah also had less than optimal weather. However, her holiday expectations were not reliant on spending the entire time on the beach. Being aware that weather is a fickle beast and that forecasting it accurately is fraught with difficulty even for experienced professionals, she had taken along a stash of books, some DVDs, crosswords and a guide to local attractions that were viable when it rained. Having planned the trip some months earlier, she had the opportunity to consider what she wanted from it and had concluded that it was the opportunity to be on her own and to recharge her batteries. She had chosen the cottage on the advice of a close friend who had been there several times and who knew what she liked and could tolerate.
By contrast, Gerald had relied on the vision of someone he had never met before and had no clear idea of what he was hoping to achieve. He was effectively following someone else’s dream. Buying at the last minute caused him to overpay for something that he didn’t enjoy and which left him entirely at the mercy of factors outside his control.
There are similarities here to investing – in both cases, there are elements outside your control, whether it be the weather or unexpected market movements. However, just as the holidaymaker can prepare for unexpected weather by packing carefully and having alternative plans for contingencies, the investor can prepare by holding a diversified range of assets.
Making investment decisions on a carefully considered basis rather than in haste affords more flexibility when it comes to both costs and structure. Most importantly, giving due consideration to what it is that you are really trying to achieve and what you are willing to accept to get there reduces the likelihood of taking risks which are inappropriate for you. If you are going to take advice from someone else, do so from someone who understands you rather than a stranger (the pundit on TV or in the newspaper knows nothing about you and doesn’t really care).
Appreciating these simple points can make your journey far less stressful as well as more successful.
Incidentally, lest you draw the impression that it always rains in Wales, I spent a week there around Easter this year and having prepared well for the expected conditions with waterproofs and jumpers, we had no rain at all and wished we had packed some shorts – some friends that we met up with on the way home and who had been staying a few miles down the coast had exactly the same experience. Next time I’ll be more diversified….