Mindless or passive investment means no need to think or make decisions. Examples —

• * #1) buy and hold an index ETF without monitoring.
• * CPF compulsory no choice
• * regular savings plan
• * 401k

Over the years, there’s a big debate whether the effort (3H/week for me) spent on active investment can beat mindless investment over the long run. Many researchers point out the stock index (#1 above) beats most actively managed funds. I am suspicious of that.

This is the same question I asked in the beginning:

Q1: … so does my effort outperform mindless investment? I have a few answers:

A0 — probably not. I will probably reduce the effort to 2Hr/week, and increase my exposure from S$100k to 150k.

A1 — Financial market is powerful and unpredictable, a bit like the huge dragon in the 2nd movie [[how to train a dragon]] … and we can learn some of its “behavior”.

We are all affected by the market in terms of family finance (some of my friends made millions of Chinese RMB by being lucky with property investment. Others lose thousands and thousands of dollars.) So it’s worthwhile to study some of this “market behavior”.

However, studying such a beast is confusing and apparently fruitless. One pattern (or “behavior”) is mean-reversion and cycles. Another pattern is “higher risk assets give higher return”. My experience taught me — I believe one of them and regard the other as the biggest lie in the investment world. (You know which is which!)

Yet another pattern is that in bad times diversified portfolio suffer lower losses than un-diversified portfolio — questionable, based on my experience.

Yet another behavior is the tight correlation among all the regional equity markets. How highly correlated? I learned by investing in them at the same time.

There are books and training classes on the behavior or financial markets. I’m sure over time I will find out how vast this knowledge is. However, it’s not how many hours I spend reading/discussing that improves my knowledge of this “dragon’s behavior”. It’s how many trades I do, how long I hold them, how much risk money i play with… that improves my knowledge.

A2 — beside studying markets, it’s equally important to study our own individual “risk profile”. The standard portfolio and standard investment style is a bad mismatch for my risk profile. As hinted in my earlier mail (below) i developed my own risk management rules by hitting real losses.

Every Singapore investment consultant use a Government-required questionnaire (20 pages of nice diagrams and good questions) to help the retail investor find out his/her own risk profile. Good start, but uttlerly inadequate. I only figured out my risk profile by taking risks and losing money.

On Sat, Nov 1, 2014 at 11:18 PM, Bin TAN (Victor) wrote:

Hi Xia Rong,

Working in Merrill Lynch, I’m only allowed to trade unit trusts, indices and
FX, not individual stocks/bonds. I have spent the last 2 years trading only
two markets — unit trusts and a few currency pairs. I want to be critical
about myself — have I improved and grown stronger as an investor.

This is an important question. I have limited time to spend with my kids,
with my Master’s program, learning c++, with friends, or work-out… as you
surely understands as a father. Therefore, the hours I spent on personal
investment need to bear fruit, otherwise i better save the time. Many people
advocate not just passive or mindless investment like regular savings plans
into some balanced fund. I tried and ran away from it (will share with you
why if interested.)

Mindless investment costs a few hours (or maybe up to a day) each year —
talking to salespeople, reading financial news…, whereas I spend 3 hours a
week, so does my effort outperform mindless investment? That’s Question 1.

A related question (Q2) is, does mindless investment outperform
no-investment, like compulsory savings (Central-Provident-Fund) or insurance
policies, or time-deposits? I don’t have an answer. Based on my limited
observations, I’m biased against no-investment.

On the other hand, I recognize mindless and passive investment can suffer
losses that fail to recover over many years whereas I have not seen anyone
hitting losses with no-investment. I noticed many major markets (Europe,
Japan, Hongkong, China etc) take 10+ years to recover to the last peak. For
example, my mother’s investment at end of 2007 has negative return whenever
we look at it. Stock market bubble is real and does hurt mindless investors.

Yet another related question (Q3) is inflation. I generally don’t worry too
much about it. Investing to beat inflation often results in losses…

Now i will try to address the tricky question Q1. I feel my FX investment is
improving compared to my first year. I learnt many lessons and know what to
avoid i.e. learnt a bit of risk management. I now invest very little amount
in FX ( though notional is high, like 100k – 200k, down from 600k two years
ago:)

In terms of real capital, I invest perhaps 10 times more into unit trusts.
Again, i feel i’m more skilled than earlier —
– I know my preferred allocation between equities and bonds — 20/80 or
10/90
– I know what i like/need — regular income, anti-correlation, extremely
volatile funds …
– I know to avoid balanced funds. i know how to use RSP.
– I know how to diversify — using very focused (and volatile) funds
– I know to spend more time buying and less time analyzing/reading. I use
small but real investments to watch the market.
– I know i will inevitably suffer losses. I have some ideas how to cope —
risk management, my style.
– i started with small amounts, and now invest about 100k, and I feel OK
about my diversification and risk exposure.

But how about my investment performance, relative to mindless investment?
Based on limited observation, i guess i’m not under-performing. But is the
excess return big enough to justify the hours? Not sure. May not justify.
Maybe i should cut down the hours but i’m kind of hooked. I now spend more
time on personal investment than on c++/c# combined:)

Going forward, perhaps i will invest more aggressively, take on more risks,
lose bigger amounts, learn more lessons, before I cut down.