Most of you all have probably heard of the classic fable of The Tortoise and the Hare. I learned about it in elementary school. Needless to say, it’s a fable that can be applied to us adults as well. And especially in the area of Personal Finance, there is an important lesson to be learned, which is keep focused and disciplined with your financial goals like the Tortoise and don’t fall asleep like the Hare.
Invest Like a Tortoise
From the book, The Investment Answer by Daniel C. Goldie and Gordon S Murray, the authors use the story of the Tortoise and the Hare by discussing two hypothetical portfolios, one with a low volatility (tortoise) and one with a high volatility (hare). Both with the same average rate of return, but the low volatility portfolio is stable and the high one swings up and down more in overall value. According to his analysis, the one with the low volatility has more value because of the compound return. This is because the low volatility portfolio has a lower standard deviation and requires less recovery to make up for investment losses that occur in some years. As a result, the portfolio is starting year after year with the potential to enjoy more gains and more compounding.
What I gather from this story reading it as an adult are so many things. First, the Hare was off to a great start. Think about this in the investment sense. You’re starting off so purchased a couple of stocks here and there and a couple of funds. Then the Hare decided to take a nap once it was ahead. Same concept here; your investments are doing well so you don’t bother checking up on them and decide to just take it easy.
But when you wake up, what happens, maybe you’re over-weighted in one position, under-weighted in another, maybe the fund you’re in started investing in underlying assets not specific to your investment goals, maybe you could have sold a position at a high profit and reallocated your proceeds accordingly, but we’re taking it easy.
Additionally, you may fall asleep like the Hare by switching jobs and not enrolling right away in your new organization’s retirement plan. Enrolling as soon as possible is critical, but especially so if your company offers a matching contribution. Be sure to complete this paperwork and take steps to transfer from your old plan into this new one.
Another lesson from the Tortoise and the Hare fable is to be consistent like the Tortoise. The point of this is to continue to keep saving towards your investment goals. Stick with a number per week or per month that you neither too comfortable with nor too uncomfortable with. In other words, you want to be able to feel like you are stretching yourself a bit in order to save meaningful amounts.
And a fantastic way to achieve consistency is to make savings and investing automatic. Automatically works because after a while you’re lifestyle will adjust to not having the extra money at your disposal and you’ll gain the benefit of compounded savings as your nest egg grows.
Yes, I have fallen victim to the life of fast trading, getting in and out of positions….usually on the same or a couple of days later. It’s not like I lost a lot in this strategy, although sometimes I did lose and ended up selling stock to avoid losing more. Usually, I would find a cheap stock whose earning was to be published in a day or two. I checked to see if the stock was trading at a low price based on its history for several months or up to a year. And then I would also check the earnings estimates to see if they were positive.
After the report, I would sell a couple of days later, usually with a minimal profit. This required a LOT of reading, decision-making, and RISK! It was a fast investment strategy like the Hare and dangerous. Because it required so my effort, I decided to stop and instead buy and hold. I was young….still am relatively 🙂 and thought that hey I’m not going anywhere so why should my investments go? The volatility aspect in the fast trading environment was also a factor that was stressing me out.
One stock I remember is Family Dollar Stores, Inc. – FDO. I owned it for less than a week and sold it, most likely for a minimal gain and then taxes on top of that of course. This was back in summer 2008 when it was around $22-$25 per share. BUT if I held, today it would be worth close to $80 per share more than 3X its value!
Advantages to Taking Your Time
Taking your time means preparing a plan to save and invest. This includes researching investments online with reputable websites, discussing with your friends, colleagues, and professors who share a similar interest. When you make an informed decision, it will bring with it confidence that you have invested in something that resulted from doing homework and having your facts and analysis in line.
Part of taking your time is that time itself is on your side. And having more time means starting to save early in your career. So if you’re just starting out in the workforce and are in your early 20s, start saving now!
Your young and will be able to adjust your lifestyle quickly by making important changes like living with roommates, buying gently used furniture, and learning to cook at home. CNBC says that 25% of your gross pay should go towards savings. But this includes company matches and paying off credit card debt as well.
So readers, are you a tortoise or a hare in your financial life? Did you have a different investment strategy in the past? If so, what did you change and what made you change your strategy?
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!