5 truths of investing from an FT expert

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Here’s a collection of five investing lessons Jonathan imparts in the book:

1. Invest in stages - even when life doesn’t want you to

There’s lots of reasons why the investment industry wants you to invest your money regularly, Jonathan writes. “The financial services industry vigorously promotes regular savings and investment. No wonder: predictable income pleases their own investors.”

“To be fair, regular investment can also benefit savers by hard-wiring provision for the future into household budgets. Another big plus of putting a regular slug of money into investments is that it eliminates a central challenge of investment: timing purchases well.”

The great advantage of investing regularly rather than in a lump sum is not mathematical - it might work in your favour, or it might not. Rather, it is psychological. If you invest a small amount and markets fall you can worry less, because the next investment made a month later will buy you more assets for your money. The overall effect over long periods is to average out the buying cost of your investments, thereby reducing risk of losses made after a large, one-off investment.

As Jonathan writes, you can get the benefits of investing this way even if money to invest doesn’t come along in a regular stream: “Most people configure their savings and investments around their lives, rather than vice versa. Investments therefore tend to be lumpy. They may be triggered by deadlines to make tax-free contributions to pensions or savings plans. They may be the result of getting a bonus, selling a business or simply noticing that more money is sloshing around in a bank account than expected. If so, there is something to be said for trickling the sum into market investments over a period of weeks or months, to get at least some of the benefit of cost averaging. The principle works on the way out too: drawing money out gradually buffers you from big, short-term swings in markets.”

2. Don’t confuse doing nothing with taking no risk

Many of us will have felt anxiety as the value of our investments lurch about. During such times it can be a comfort to take money off the table and seek the refuge of cash. Sometimes, the fear of loss prevents us from investing at all. This can be a mistake, Jonathan writes.

“Getting your head around risk is an important cognitive challenge for the investor. It is made harder by a dangerous pitfall. When contemplating risk taking, it is easy to make the lazy assumption that doing nothing is the same as taking no risk. This is a big mistake. Sitting on your hands creates what is known as an opportunity cost. This is an important concept in investment. If you keep all your money under your mattress, you are passing up on the opportunity to grow it through investment. The real value of those notes and coins will decline in line with inflation.

“Braving uncertainty by investing in markets exposes you to losses. Playing it safe exposes you to lost opportunities.”

3. Be an investor, not a speculator. And never a gambler

To the uninitiated, investing can seem like an extension of gambling. But there is one key difference - time.

“The dirty truth of financial markets is that investment and gambling shade into one another. Both activities involve risk taking in the hope of financial rewards. The investment industry discourages embarrassing comparisons, however. Playing the markets as a game of chance is traditionally defined as speculation rather than gambling. The border between speculation and gambling is fuzzy. But I believe there is a real difference between speculation and investment. It is defined by time.

“If you make frequent, short-term trades, high transaction costs mean you are likely to lose money”, Jonathan writes. “If you deal via a financial bookmaker, losses are a near-certainty. The odds will be stacked against you. If, on the other hand, you spread your risks across a range of investments you hold for the longer term, you are likely to make money.

“Longer-term investment reduces the impact that market ups and downs have on most securities. Price variations that appear alarmingly jagged over a few days become irrelevant noise when seen in the context of longer-term performance.”

4. Beware the stories we tell ourselves

Jonathan dedicates a chapter of the book to exploring cognitive biases, including a section on our penchant for creating narratives to explain the world around us - even where none exist.

These can be dangerous for investors. It could be overestimating our skills at investing because we are skilled in other areas of life. Doctors are prone to this, apparently.

As Jonathan writes: “Thinking you are above average is a useful adaptation to living in a competitive society. It encourages you to pursue demanding studies, push for promotion, woo a desirable partner and ignore gaslighting by rivals who prey on the insecurities of others.

“In personal investment, however, you really have nothing to prove to yourself or anyone else. You just want to maximise returns at levels of uncertainty that you are comfortable with. Self-awareness should help you here. Avoid attributing all your gains to skill and your losses to chance. Both factors will apply in both sections of your personal profit and loss account. Some people need to be particularly scrupulous in their self-scrutiny. For example, doctors, according to their own testimony, have a strong penchant for overestimating their abilities as private investors. Quasi-priestly expertise in one field of endeavour may delude them into believing they have it in another.”

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5. Don’t be slave to a number - target life instead

If you have taken the step of risking your money by investing it the chances are that you are focused on the numbers needed to achieve your goals. But Jonathan reminds his readers not to forget the purpose of investing in the first place.

“The best advice I have heard on savings and investment planning is this: ‘Describe your objectives broadly, in words. Then think about the money that might be needed to achieve them.’

“Research suggests that money buys some happiness. But, after basic needs are covered, money generally provides diminishing returns (of the psychological rather than financial kind). Most people fear retiring on an income significantly less than their working incomes. In reality, most retirees cope well. Costs tend to be lower. For example, professionals can typically enjoy an equivalent standard of living in retirement to that of their middle years on half the income, according to research. Many pensioners become net savers in their later years.

“The punchline to all this is that the numbers we use to envisage investment outcomes should be our servants, not our masters. If a number you had in mind no longer serves your purpose, think of another number.”

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