The Key to Your Investment Success


Last Thursday, Dan Bortolotti from the Canadian Couch Potato wrote one of my favorite articles that I’ve read in a while: Why Your Problem Is Not Your Funds.

The theme of this article fits right into the points I made when questioning why investors feel like they have to beat the market, but he makes many of the arguments much better than I did. I would highly encourage anyone with any interest in investing to check the article out themselves, but today I’d like to talk about a number of the reasons why I think the message it delivers is so important.

Some background

The Canadian Couch Potato is a site dedicated to an index investing approach. An index approach to investing is one that attempts to capture market returns in the most efficient, cost-effective way possible. It is a strategy born out of the huge amounts of data showing that even professional investors fail again and again to beat the market, and that there are very simple indexing approaches that allow you to achieve superior returns.

But even within the broad concept of index investing, there are many different strategies. There are always people looking for an edge, and this leads to a never-ending parade of “new and improved” indexing approaches, each of which promises to be better than the one that came before it.

Dan’s article is in response to people asking him for his thoughts on one particular new indexing strategy. His viewpoint, and it’s one I 100% agree with, is that the real problem investors face is not finding the absolute optimal strategy. It’s not that they could have achieved 1% better returns if they had only used a different approach for the last 10 years, 30 years or whatever. It’s that they can’t even pick an approach they like and stick with it, and this lack of discipline is what truly keeps them from reaching their goals.

Tell me again, why are you trying to beat the market?

My absolute favorite part of Dan’s response comes right in the middle of the post. I’m just going to quote it here because it’s so damn good:

Has there ever been an investor who fell short of his financial goals because he earned only the returns of a cap-weighted portfolio? “I did everything right,” we’d hear him lament. “I paid down my debt, lived frugally, and saved regularly. I built a diversified, low-cost, tax-efficient portfolio of index funds appropriate to my time horizon and risk profile. When stocks plunged I kept my head and stayed invested—I even rebalanced to get back to my targets. I ignored all forecasters and swore off market timing. Now look what happened: my cap-weighted funds underperformed the hypothetical backtested performance of several alternative strategies. Now I can’t have the retirement I hoped for.”

When I read that passage above, the absurdity of it really struck me as comical. But the point here could not possibly be more profound or more important for investors to understand. The true secret to investment success is not picking the perfect strategy. It’s understanding your personal goals and making a plan to reach them. It’s picking a “good enough” investment strategy and having the discipline to stick with it through the ups and downs. It’s being able to ignore the noise around you and focus on yourself.

There are so many simple things we can directly and easily control that will put us on the right path towards reaching our goals. Constantly striving to get better than market returns is simply not one of them, and if you aren’t already following all of the principles laid out above, then trying to beat the market should really be the least of your concerns.

Will you stick with your plan?

My other favorite part of Dan’s response came in one of the comments. Again, I’m simply going to quote it directly because it’s so good:

I can’t prove this, but in my experience there are two broad categories of index investors. The first recognizes that broad diversification, low cost and discipline are what matter most, and that’s enough for them. The second recognizes the value of these three things but is constantly searching for something better. There might be something better, I don’t know. But this group will never be content with their current strategy, and it’s the constant search that leads them them to tinker.

If someone came to me and said they’ve been using some specific alternative indexing strategy in a disciplined way for five years—especially a strategy that lagged the market for some period—I would encourage them to keep it up. But I have never met one. Usually what I see is people who are dipping a toe into this and that, trying to figure out the optimal strategy, putting a lot of value on recent performance and hypothetical backtests, poring over every research paper that promises some improvement on traditional indexes, etc. I do feel these investors are far more prone to stray from what’s important.

Again, it’s the ability to focus on what’s important that separates successful investors unsuccessful ones. Getting the big things right (diversification, low costs) and sticking with them is much more important than trying to predict the little things that may give you a slight edge. And in trying to do the latter, you’re much more likely to continually switch strategies, which in turn is much more likely to harm your long-term success than to help it.


This is an article I will point to for years to come because the message is so important and so well articulated. There are certain things that truly matter for an investor to be successful and other things that don’t. Being able to distinguish between the two and consistently doing the things that matter will make all the difference in allowing you to reach your financial goals.

Other articles I think you’ll like

Planting Our Pennies: Following up on their great article from a couple of weeks ago, the Pops look at the numbers comparing a 20% down payment to a 3.5% down payment while investing the difference. The results are pretty interesting and well worth checking out.

Frugal Rules: An informative post from Pauline on things you need to consider before becoming a landlord. I think owning a rental property is a very interesting way to build wealth, but there are definitely a lot of things to consider before jumping into it.

Thrift Genuity: Greg has some good lessons for interpreting the language of a recruiter. As with anything else, make sure you understand their motivations before believing that they always have your interests at heart.

Journey to Saving: Nice discussion from E.M. on some of the pressure surrounding gift-giving. How do you handle it in your household?

The College Investor: Rob has some good advice for parents who want to help their high-schoolers get started with investing.

Done by Forty: Getting rid of 30 things in 30 days. I love this simple approach to de-cluttering. Each day is a small habit, but add it up over time and you get big results.

Thanks to these carnivals for including me along with some other great posts!

Carnival of Financial Independence
Carnival of Retirement
The Tortoise Banker Carnival
Yakezie Carnival

Photo courtesy of Omar Reyes

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16 Comments... Read them below or add one of your own
  • DC @ Young Adult Money July 26, 2013

    Great post, Matt! That really is a great article and doing things consistently over time makes so much more sense, especially with investing.

  • E.M. July 26, 2013

    Thank you for the mention! I will have to check this article out. When I start to invest I don’t think I’ll be changing much around often, unless I’m getting horribly awful results that warrant a change. Sometimes, the more we try to alter things and touch them up, the worse they get! I would know from being too much of a perfectionist, and it’s just stressful.

    • Matt @ momanddadmoney July 26, 2013

      Just make sure the “horribly awful” results aren’t simply a reflect of what the market’s doing. If they are, it’s very likely that there’s still no change needed.

  • Andrew July 26, 2013

    Great post! I consider myself an index investor and I’m generally pretty consistent. I have my most of my IRA in a target fund with Vanguard. Although I did have an urge to tinker and added the emerging markets index fund (although only a small amount). And I’ve recently considered added the REIT index fund. Yea I know, I can’t help it. It doesn’t happen often but every now and then I feel like added something to get an edge as you said.

    • Matt @ momanddadmoney July 26, 2013

      I don’t think there’s much harm in tinkering with a small amount of your portfolio (around 5%). I also think it takes some time to get to a strategy you’re fully comfortable with. I didn’t really get there until about a year ago. But it’s definitely worth resisting the constant desire to tinker, as that will only cause you harm over the long term. I’ll admit that I get pretty tempted myself at times, but I’ve resolved to stay put unless there’s a REALLY good reason to change, which would basically just be a big change in my life circumstances.

  • One of the last posts on the bucks blog a few weeks ago was written by a wealth advisor who didn’t seem to believe that there were actually investors who had the discipline to keep up with index investing over the long haul. He had this notion that we’d all get impatient and want to beat the market or terrified and sell when it dropped and I didn’t get that. This has been a proven well-accepted method now for what? 20 years? Index investors can’t be that rare, can they?

    • Matt @ momanddadmoney July 26, 2013

      I don’t necessarily disagree with him, but I don’t think it applies to index investing in particular. I think it’s hard for people to stick with any investment strategy for any extended period of time. I think index investors are getting less rare all the time, but I think the ones who truly stay the course through think and thin are definitely rare. It’s too bad, because like you say it’s a pretty well-proven approach at this point. There really isn’t much to disagree with.

  • Tanya @ The Heavy Purse July 26, 2013

    I’ll have to check out his post; it sounds great. I remember from days working in the financial services industry that getting people to actually set goals and then stay the course (within reason, of course) was one of the hardest things to do. Everyone is always chasing everyone else and after that hot tip that is no longer hot (if it ever was!). We like instant gratification in our personal lives and in the stock market. Neither are really very good for us! Have a great weekend!

    • Matt @ momanddadmoney July 26, 2013

      Yep, it’s definitely a problem when people start chasing performance instead of goals. It loses sight of the whole point of investing in the first place.

  • cashRebel July 26, 2013

    For a while I was trying to find the latest and greatest index investing trick. I was changing things up every few months, but I’ve since realized that I should just leave my money alone and let it grow. Sure my asset allocation isn’t 100% perfect, but it’s certainly close enough!

    • Matt @ momanddadmoney July 29, 2013

      I was there too. I wasn’t actually tinkering much, but I knew I wanted to stray from a simple target date fund and kept changing what I wanted to commit to. I doubt I’ll ever feel like I have it perfect, but like you I feel really good about it and hope to stick with it for the long-haul.

  • Done by Forty July 27, 2013

    Thank you, thank you for the mention and the link, Matt.

    I struggle with asset allocation because there are so many different approaches. We use Bernstein’s Simpleton’s portfolio and have so far stuck with it, but we are still relatively new with it. I also do feel the urge to tinker with it (e.g. – let’s add some REITs, or move to the Coward’s Portfolio).

    • Matt @ momanddadmoney July 29, 2013

      Just looked up the Simpleton portfolio and I think it looks great. Very similar to the 3-fund portfolio that serves as Vanguard’s basis (well now it’s 4 funds, but same idea). I get some of the same urges, but in the end those small changes wouldn’t make much difference. I just remind myself that it’s more likely to do harm than good.

  • Greg July 28, 2013

    Thanks for the inclusion Matt! And very important advice about investing and staying the course. I like to keep it simple – diversification with long term investments.

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