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Exploring the mousetrap, timing, and homework

Welcome to the Intentional Dollar weekly newsletter — great work taking this small step to move your money forward. I’m Logan, a Certified Financial Planner™, and I’m excited you’re here!

What’s inside?

• One tool to experiment with

• Two quotes from others

• Three questions to dig deeper

• Four lines of poetry for the point

Disclaimer: This is not investment advice. These weekly posts represent my simple thoughts, a few quotes, and some questions — for educational purposes only.

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_{One tool to experiment with:}

The Mousetrap

When a mouse reaches for a savory slice of cheese, the ultimate consequences don’t get a voice to debate. The cheese looks great, the mouse is hungry, and the trap is set.

Left on our own to manage our portfolios, our investment selection criteria resembles that of hungry mice; we are edge-runners, we are return-chasers.

And as investment managers, we are forced to answer a question, “What are the best companies and funds to invest in?” This challenging question finds us most frequently in our 401k’s and IRA’s. Snoozing over a list of 20-30 similar symbols and drab names like “mid cap value,” “large cap growth,” “international blend” creates a convoluted maze, and a dangerous one filled with mousetraps.

These traps are a little unique. There is no angry homeowner interested in your demise, and there is no cheese. What we are dealing with here are mousetraps, some armed, and some duds, that are partnered with a percentage.

This percentage is the fund’s historical return. With no prior knowledge of portfolio theory and mean-variance optimization, we go for simple. And simple here is to assume that the recent past looks like the foreseeable future.

This simplification is a learned cognitive bias, a mental shortcut, and one that can be a tub of TNT to your retirement. Once learned, we use this shortcut to inform our investing forever.

“But why would you buy a fund that’s had bad performance? Doesn’t it make sense to buy the best performing fund in the group?”

It’s not that we want to buy bad funds, it’s that we don’t want to assume that good returns equal good funds.

Whenever we make investment selections from past performance, we come to own a fund that has done well — not necessarily a fund that will do well. If you catch a disclaimer in those dry investment brochures, they will warn, “past performance is not indicative of future results.” It’s thrown out so much we don’t listen to it.

Building a successful portfolio should be anchored on a fund that will deliver reliable through-cycle returns. Through-cycle returns are the kind of returns we can have confidence in — something like the S&P 500’s average return. We don’t know the one-off annual returns, but we have confidence that through peaks and troughs, booms and busts, fear and greed, the market return will prevail. And that’s enough to get you where you want to go. That’s how long-term wealth is built.

Playing the return chasing game is a losing game. Like trying to consistently win in Vegas — if you play long enough, the house odds will prevail — you won’t win. You might avoid the snapping metal bar from a few armed traps, but eventually you’ll get trapped.

If you’re guilty, or you want to spot a return-chaser, you’ll observe this pattern:

• Fund A: 3-year return +20%; you buy. Fund A starts to perform poorly, and you don’t understand why it’s losing money; you want to make a change

• Fund A: 1-year return -10%; you sell

[Enter Fund B]

• Fund B: 3-year return of +17%; you buy, but Fund B is unimpressive compared to other funds over the past year, and only generates a 3% return.

• Fund B: 1-year return +3%; you sell  

Repeat the dance and your moves look something like this:

It feels like you’re doing a lot of good here, but when you reach for the fleeting high return funds, you can end up destroying account value.

There’s only one way to know you’re not buying at the top and selling at the bottom, and it’s this: buy and hold. 

Do this, and you’ll win the average through cycle investment return — a much better position for you than the risky mousetrap dance of buying high and selling low.

_{Two quotes on timing:}

Timing is leverage that can lift an unimaginable weight.

_{Three questions on homework:}

1. What homework do I need to complete before entering this agreement, engagement, investment, purchase?

2. When was the last time I made a suboptimal money decision because I didn’t do enough homework?

3. How much time should I spend on this assignment, and what if I implemented a minimum threshold before making the decision?

Which question stuck with you? Questions like these are spotlights for the mind. Reply to this email and let me know which one shined light on a previously dark cave.

_{Four lines of poetry for the point:}

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Content ideas, questions? Reply to this email or reach out to me at [email protected]

Disclaimer: This is not investment advice. These weekly posts represent my simple thoughts, a few quotes, and some questions — for educational purposes only.