“I used to drive a lot!” says Sneddon. “It got me thinking about how similar driving a car and investing can be.”
1. Short-term noise distracts. Keep your focus on long-term goals. The robot is red so you stop. There are cars all around you; six or seven of them in front of you. The robot turns green, but before you get to the front it has turned red again. “If only there weren’t as many cars right around and in front of us – if only we didn’t focus on the short-term noise but kept focus on our long-term goals – we’d get there! The robot turns green, but we get caught up with the cars in front of us; the short-term noise.
2. Chopping and changing is costly and doesn’t get you anywhere. How often when you’re stuck in heavy traffic do you see some highly agitated driver changing lanes over and over in a desperate, yet futile, attempt at getting ahead? While you stay put they go back and forth, in and out, yet 10 minutes later you pull up beside them. “This is a bit like how many investors behave,” says Sneddon. “When a particular fund outperformed our own we chase that performance. We buy high and sell low. We chop and change. Yet all the research shows we’d be better off if we just stayed put and got the average.”
3. There are no second chances. When you bump into another car you might, filled with regret, be thinking, “If only I had looked! If only I could get a second chance!” “This makes me think about things such as providing for retirement and getting insurance against disability,” says Sneddon. “You don’t get a second chance!”
4. If you don’t service your car regularly it will break down. The same applies to your financial plan.
5. You adjust your driving according to the conditions (e.g. rain, traffic, potholes, etc.). In the same way, investments sometimes need rebalancing. “There are times when the market is cheap and there are times when the market is expensive,” says Sneddon. “If you indicated a desire to be, say, 60 percent in shares, and the market has run very hard, you might in time find yourself at, say, 70 percent. Then it’s time to cut back. The opposite can also happen; you need to adjust how you invest to the conditions.” This is not chopping and changing such as in the example mentioned above. This is staying the course; aligned to our long-term plan.
6. You need a map if you’re planning to go on a long, rewarding road trip. Imagine tackling a road trip to a new and exciting place without a map. You’ll drive around in circles and it won’t be much fun. The same applies to financial planning.
7. We all rate ourselves as above average drivers. Surveys show that about 90 percent of drivers consider themselves above average drivers. You don’t need to be a statistician to know that we’re deluding ourselves in this regard. “When it comes to investing you need to be consistently average,” says Sneddon. “We need to use more passive investment funds!” Markets have skyrocketed these last five years, causing you to think you’re an investment guru. You almost certainly aren’t; the market has done all the work. “Passive funds are Gautrain of investing,” half jokes Sneddon. “It’s efficient, it works and it cuts down on costs. The savings are unbelievable if you can cut your costs by even half a percent over a 10, 15 or 20 year period.”
8. Some people need bakkie, others a Kombi while a Polo Vivo should be fine for most. One size does not fit all. “It’s ‘personal’ finance for a reason,” says Sneddon.
This article first appeared on CapeTalk : 8 lessons I’ve learnt about investing from driving my car