Updated: Feb 10, 2021
As Investors, we are often fixated on financially focused metrics to measure our investment journey. I suggest there are other ways beyond this to do so.
The clearest way to measure how you're doing financially is to always look at the numbers. There's no disputing that. However there may be times where markets are going through a trough or it's early on your investment journey and your investments just haven't had the chance to demonstrate their progress. In that case just how can you measure your progress as an investor?
I was recently thinking through this issue. One of the things that came to mind was that when I started my investment journey, I recall initially going to a financial planner for some advice. I was armed with details of an investment fund that had the best financial returns over the last 12 months and was keen for this planner to invest my funds in that specific mutual fund.
I didn't really pay any regard to the funds mandate, what its management expense ratio was or even what its long-term track record was. I felt that given it's past 12 months performance was so spectacular it could likely continue to generate those returns well into the future.
What was also interesting to me about that first meeting with the financial planner was that I had a sense that markets were about to decline over the next 1 to 2 months so I was keen to have her hold off on establishing my investment account until this time had passed. Clearly this demonstrates a lack of long-term thinking and a willingness to time the markets.
Little did I realize at the time just how poor the track record of actively managed funds tend to be and how hard it is for them to consistently outperform the benchmark given the amount of the annual fees that they charge.
What was also interesting to me about that initial discussion with this financial planner was hasty in suggesting that I have my funds invested in the financial planners house funds which no doubt she was incentivized to push and that the funds that she was recommending to me tended to have the largest annual trails that would flow back to her.
What amazed me about that time was her apparent willingness to ensure that I initiated my investments with a margin loan to accompany the equity that I was putting in. Of course she explained this as being a tool that would help accelerate my long-term wealth creation. However the amount of gearing that she had suggested for my investment was actually as high as 50%.
Given what I now know about gearing and margin lending as a double-edged sword, that seems incredibly reckless to me to suggest that a newcomer into the financial markets should have such a high level of gearing and margin lending at the start of their investment journey.
The planner also took no real steps to ensure that I understood the downside and negative consequences of investing in such a manner. I recall seeing charts in a fancy presentation which showed the long-term compounding effects of a highly geared portfolio, but nothing which showed the debilitating effects that an event such as 2008/2009 could have on your wealth creation. I also recall that the planner was very quick to suggest that I use the planning firms margin lending facility rather than trying to investigate independent margin lending facilities on my own which may have been offering lower interest rates and lower establishment fees also.
Sometimes I look back at the start of my investment journey and I chuckle to myself at just how impressionable an investor I was and how little I knew about how the broader financial markets function. And today, some 20 years later the basis of my investment are completely different. I eschew actively managed funds given I know how detrimental the effects of constant portfolio churn tend to be on performance.
I also avoid actively manage funds precisely because of the high expense ratios that these funds charge on actively managed accounts and how that diminishes the likelihood that they'll be able to outperform a low-cost index of a long period of time. I tend to be much more focused now on individual stocks that have strong competitive advantages, good owner operator linkages and also strong investment tailwinds that will enable these businesses to grow and grow well over the long-term.
A good return on invested capital rounds out my toolkit of what I look for in a good investment.
So where am I going with all of this?
Well sometimes you can look at your investment portfolio day after day and second-guess the investments that you've made and wonder if you're doing the right things. You see highflying stocks that move up 10 to 15% on a monthly basis and you question whether you should be in those kinds of businesses as well.
At times I believe it's helpful to take a step back and reflect on where you've come as an investor. Part of doing that is evaluating your progress in terms of how you are thinking around investments that you make and how that has matured and hopefully evolved over time.
In my case going through that journey just recently provided a refreshing reminder of my own journey and how my own thinking as an investor has has evolved over time.