My Investing Checklist

Barry Ritholtz is working on a checklist of the most common errors investors make (and checklists can be extremely valuable). Here’s my list of such errors and some related maxims.

  1. Understand the “arithmetic of loss” (a 10% loss followed by a 10% gain does not get you back to even).
  2. Correlation is not causation; consensus is not truth; and what is conventional is rarely wisdom.
  3. High fees are a major drag on returns; tax advantages and consequences matter a lot too.
  4. All other things being equal, ETFs are better than mutual funds.
  5. Complex instruments, reaching for yield and illiquidity are usually more dangerous than they appear.
  6. Asset allocation is more important than the product selection of a portfolio’s component parts.
  7. Since passive management beats active management most of the time, it is the appropriate default.
  8. Be clear about and cognizant of what Barry Ritholtz calls the “long cycle” – secular and cyclical markets.
  9. Our psychological make-up and the behavioral biases and cognitive impairments caused thereby conspire against our investment success and even when we recognize these problems generally, we typically miss them in ourselves (“We have met the enemy and he is us” – Pogo).
  10. Forgetting that nobody is close to objective and that nearly everyone wants a piece of the action will cost you a lot of money.
  11. An otherwise great investment plan can readily become a disaster is it doesn’t line up with our understanding, goals, objectives and risk tolerances.
  12. Risk is a complex and multi-faceted thing – it’s much more than just volatility.
  13. Manage risks before managing returns.
  14. Never lose sight of the facts that investing is both probabilistic and mean-reverting.
  15. Saving, trading and investing are very different things.
  16. We always know less than we think we know; thus forecasts are rarely even close to accurate.
  17. When making a trading decision, measure twice, cut once.
  18. It’s very dangerous to fight the Fed and/or the government.
  19. When reading financial or investment papers, the best stuff is usually in the footnotes.
  20. When you have reached your goal, stop playing.
  21. “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for the simplicity on the other side of complexity, for that I would give you anything I have” (Oliver Wendell Holmes, Sr.).
  22. Data should always trump opinion and ideology.
  23. It is little consolation to lose less money than others or less than one’s benchmark.
  24. History doesn’t repeat, but it does rhyme.
  25. Save as much as you can as early as you can.
  26. Always have a contingency plan.
  27. Create and implement a written investment policy statement; review it often but alter it rarely and only for very good, data-driven reasons or due to a change in personal circumstances and after very careful consideration.
  28. When the cost of a negative outcome is greater than you can bear, don’t do it (or get out), no matter how great the odds of success appear.
  29. “This time is different” Is almost never true, especially in investing.
  30. Re-balance regularly.

23 thoughts on “My Investing Checklist

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  3. With all due respect, neither Ritholz’s list nor yours is really a checklist, in the same sense that Gawande or a pilot would use a checklist. I.e., if a checklist’s meaning is a “comprehensive list of important or relevant actions, or steps to be taken in a specific order” or an “aid to reduce failure by compensating for potential limits of human memory and attention .. [that] helps to ensure consistency and completeness in carrying out a task. In fairness to you, you don’t call it a checklist.

    When it comes to specific investments, Tim duToit has an interesting checklist:

    Everything in your list is good advice. And it may be a good thing to read quarterly (or more frequently). But I wonder, because it is not really an actionable checklist, if it is too long to really be productive unless and until you have internalized all of the lessons and no longer need the list (hopefully not learning the lessons the hard way to get there).

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    • Simplicity before or without understanding doesn’t help (and can make things worse). But after understanding, simplification ( to make it actionable or more readily understandable) is incredibly valuable.

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