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Investors often try to look for the "perfect investment"



Behavioural expert and former financial adviser, Carl Richards, explains why investors should steer away from perfectionism...

RP: Although there are times when it pays to be a perfectionist, aiming for the perfect investment portfolio is counter-productive. There is no single optimal portfolio. It’s much more important to have a portfolio that you understand, and that you’ll stick with when markets are particularly volatile. Here is the behavioural expert and former financial adviser Carl Richards.

CR: There’s a really unhealthy sort of focus on the perfect, right? I’m going to find the perfect investment, I’m going to build the perfect portfolio. Perfect, really - in this case - is the enemy of the good. Especially because we don’t know what perfect is beforehand. We’re guessing anyway, so I think the investment process only matters to the degree that it’s going to influence behaviour. And so, if we try to optimise for that, like what’s the thing…? OK, fine, it may not be exactly the most efficient thing on the planet, but I think it will help solve this client’s poor behaviour: that’s good enough.

RP: One of the challenges investors face is what we call “noise”. There’s always someone making a plausible case for investing in a particular stock, fund or asset class. It’s not easy, but you need to try to ignore it.

CR: I can’t tell you how many times clients or, even now, readers will send in questions like: what’s the ultimate emerging markets small-cap fund? Right, and it represents three per cent of their portfolio. In the meantime, you haven’t gotten your money invested. Or in the meantime, you didn’t fund your retirement account this year. Like the old story of the doctor having a patient continually arguing: which high blood pressure medicine to take? And the doctor finally says: hey wait, you still smoke. You know, so I think that arguing about asset allocation and then focusing on the specific investments underneath - really trying to get perfect - this is the opportunity just to get started and do something.

RP: Remember there will always be funds that are outperforming at any one time, but the evidence shows that, in the long term, you’re better off with a low-cost, broadly diversified, passive portfolio. As the indexing pioneer Jack Bogle has often said, it may not be the best investment strategy ever devised, but the number of strategies that are worse is infinite.

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