The Joy Of Investing On Auto Mode

LONDON – I love America and feel very much at home there. But get in a car and I instantly become your typical Englishman abroad. No, it’s not driving on the wrong side of the road that bothers me, or forgetting that I’m allowed to turn right on red. I’m even getting used to the road signs; Xing, it transpires, means crossing (how did I not see that?) and turnpike is in fact an old English word, dating back to long before the Pilgrim Fathers.

No, my problem with American motoring is the automatic gearbox. I know how silly I’m being — automatic cars are supposed to make driving easier — and that’s why, when picking up my rental car from Los Angeles airport last week, I resolved to put mind over matter and just get on with it. Guess what? It worked. Not once did my left foot stray towards a non-existent clutch, and apart from the obligatory LA traffic jam, I actually enjoyed the ride.

From Motoring To Investing: Can It Be That Different?

Investing automatically is not unlike driving an automatic car. You calculate your capacity for risk, build a portfolio that maximises the return you can expect for the level of risk you decide to take, and then, apart from occasional rebalancing, you do absolutely nothing. No more fretting about volatile markets; and no need to scour the money pages for the latest tips or listen to that nonsense on CNBC.

The problem is that we’re prone to human emotions. We instinctively strive for something better and feel that we need to be doing something all the time. By piling into markets as they rise and getting out as prices fall, we delude ourselves that we’re doing the best we can. By switching from a fund or sector that’s on the wane to one that’s delivering strong returns, we think we’re being clever. The evidence tells us the very opposite.

Fighting That Natural Desire For Control

Behavioural finance is a fascinating subject and thoroughly worth exploring if you haven’t already. Every investor is susceptible to a whole range of biases that most people aren’t even conscious of. But, for me, one of the biggest reasons why the vast majority of ordinary investors consistently underperform the market is our natural desire for control. We’re not prepared to let things happen; instead we want to make them happen.

The problem is there are some things that we, as individuals, don’t have any control over, and the global financial markets are one of them. Of course we prefer to cling to the illusion that we can control the markets. We’re seduced by the prospect of hitting on the right stock, fund or sector at just the right time. We fall for fund ads that offer the potential of stellar gains, especially those that promise “downside protection” should the market crash.

But however much you want to believe in something, and however hard others try to make you, that doesn’t mean it’s true. The evidence couldn’t be clearer. Neither stockpicking nor market timing is worth the time or effort, and professional money managers deliver nothing like the consistent outperformance required to justify the huge expense of using them.

Is It Really A Leap Of Faith?

Many investors distrust the idea of putting their faith in something other than human beings. But that’s completely the wrong way to look at it. Investing on auto does mean putting your trust in people — millions of them, all over the world — who several times each millisecond agree on a fair price for each security as they buy and sell them. The market is like a giant super-computer, infinitely more sophisticated than your average City trader.

The choice is whether to put your faith in one person — a fund manager, say, or a media “guru” — or the collective wisdom of the entire market. Yes, it might seem strange at first. But, like a motorist swapping a manual gearbox for an automatic, it won’t be long until you forget all about it. There are more interesting things to do in life than watching markets go up and down (on reflection, the joy of moving from first gear to fifth and back again is possibly overrated).

Perhaps one of these days I’m going to arrive at LAX and there’ll be one of those driverless Google cars waiting for me. Now that really will put my trust in automation to the test.

Robin Powell is a journalist campaigning for a better deal for ordinary investors. He blogs as The Evidence-Based Investor.