Candyland

Photo courtesy of Jason Meredith

The dress was pink chiffon. Cotton candy pink. It was strapless, with a fitted bodice, nipped in tight at the waist, and the skirt a big cloud of translucent chiffon. I simply had to have it and price was no object. That evening, I tried it on again in my bedroom. Under the overhead lights, I noticed that the pink was faded and yellowed in certain spots. Looking at myself in the full-length mirror I had to admit that the huge volume of chiffon made me look even shorter than I was. Suddenly I realized I had neither the shoes, handbag or jewelry to match the dress. It also occurred to me, I would never, ever in this lifetime be invited to a cotillion, which is the only kind of event at which a 16-year old girl could wear this froth. Plus, even if I were invited to one, I had no boyfriend to take me. Shit.

What I didn’t know then and sort of know now is, before you go chasing after the ‘wow’ pieces, build a solid wardrobe of boring but hardworking staples like the little black dress. Things that will actually benefit you in the here and now, not in some fashion fantasy life.

Same goes for investing. Many so-called investors chase after the latest thing that some pundit is touting in the press, instead of concentrating their efforts on building a set of core holdings and then, if the urge continues, venturing beyond for some badaboom action.

Since most of us, including the pros, are terrible stock pickers, studies show that owning a basket of well-diversified equities, either directly or through ETFs, mutual or pooled funds is, over the long term, the best strategy.

Staying fully invested, even through downturns, has proven to be successful too. A recent study by  Bernstein Global Research looked at 1,000, 12-month periods from 1926 until 2013. Those investors who put all their eggs in the market at one time averaged returns of 12.2 percent, whereas those who bought in gradually made 8.1 percent. The worst performers were those who stayed in cash on the sidelines. They netted 4.1 percent.

If I were building a core fashion wardrobe it would look like this: Marlowe cashmere v-neck sweaters in white, oatmeal, black; Gucci or Chanel wool gardardine slacks in black, grey; Chanel little black dress; Akris white shirts; Repetto loafers, Prada sport shoes; Max Mara camel hair coat; Hermes Evelyne or Jypsiere bag; Cartier Tank Francaise watch; Cartier Love bracelet; Tiffany diamond ear studs; Tiffany Elsa Peretti Diamonds-by-the Yard pendant. Done!

If I were building a core investment portfolio it would look like this: Pipelines (Transcanada, InterPipeline); Consumer (P&G, Unilever); Financials (Scotia, TD, RBC); Industrials (Deere, Fluor, Dupont); Technology (Microsoft, Apple, Intel); Pharmaceuticals (Pfizer, J&J, Merck)…you get the idea.

Yes, they are boring but they spit out regular dividends, raise their dividends annually, and give upside potential on their common shares. Short of private placements or insider trading that’s the best deal in town given the amount of risk assumed.

Just like I leave room in my closet for a few sizzlers, I carve out a small percentage of my portfolio for excitement. So far my choices have always done well in the long-term but with lots of volatility in the short term.

It’s wise to remember the words of investor George Soros: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

I never wore the pink chiffon dress. The next day, overcome with buyer’s remorse, I went back to the vintage shop to return it. The manager put up a good fight but, in the end, she took it back. Feeling immense relief, I put the money back in my wallet and soon found some other stupid thing to buy.

Marshmallow Roast

Photo courtesy of Kate Ter Haar

Could you pass the marshmallow test?

Okay, you’re a grown-up so maybe it’s not marshmallows because even the artisanal ones are underwhelming, like eating a miniature sugar-laced pillow. Maybe for you it’s that extra glass or two of wine or the Louboutin shoes. For me it’s a big slice of Dufflet‘s carrot cake or anything from Paris/Jaipur jeweller Marie Helene de Taillac.

But whatever your weakness, exerting a bit of self-control now and again pays off in unexpectedly big ways. In a famous and oft-sited experiment conducted 50 years ago, children who were able to delay eating a marshmallow had much better life outcomes than the kids who didn’t.

The study’s author Walter Mischel rewarded kids who were able to delay immediate gratification for up to 15 minutes with two cookies. In the passing years, the children were further rewarded with higher SAT scores, advanced degrees, better weight control and stress coping capabilities, and lower drug use.

According to Mischel, the kids who passed the marshmallow test had sitzfleisch, a Yiddish word that means grit,  an ability to stick with it. Like hair, some people have more sitzfleisch than others but everyone can acquire it.

Sitzfleisch is particularly useful in investing. Many investors—both punter and professional—feel they must constantly be doing something with their portfolios. Buying, selling, shorting, hedging, leveraging…there’s holding too but, like breathing, that doesn’t seem to rate as an activity.

This chronic fidgeting comes with some costs. For starters, since no one can time the market, there’s the omnipresent stress of trying to pick the right time to trade. This is, of course, a loser’s game. Then there are the trading costs themselves, such as commissions and taxes. Each of these inexorably chip away at total returns.

A study published in the Quarterly Journal of Economics noted that, because men tend to trade more, they reduce their average returns by 2.65% compared to 1.72% for women.

Sometimes trading is the right thing to do, for example when valuations have put your strategic asset allocations out of alignment, however to trade simply out of restlessness or a compulsion that you can’t just sit there but have to do something, is a costly folly. Every time you scratch that itch, you just put million pennies in a jar.

One way to build your sitzfleisch muscle is to practice in small ways at first, then gradually build up to working with your life savings. Make a commitment to, for example, walk twenty minutes everyday, rain or shine, or stick to one glass of wine at dinner, or as Paul McCartney suggests, implement ‘meatless Mondays’ at the dinner table. Any of these would do. Before you know it, you won’t even glance twice at posh marshmallows— or flickering ticker symbols.

 

Sitting Pretty

Courtesy of James Gardner

For those of you who follow such things, “the look” these days is undone. Not “not done”, but artfully sloppy in a youthful, slightly slaggy sort of way. Mascara is applied with a heavy hand, the caked lashes casting nocturnal shadows under the eyes. Lipstick is smeared outside the lines á la Courtney Love. And hair is greasy-looking and tangled, like too many days have passed between shampoos and combs have become extinct. Alluring, yes?

Actually, yes! As the French know, there’s nothing more boring than perfection and nothing more seductive than perfection mixed with a smudge of dirt. But this devil-may-care beauty style comes with a caveat: Don’t try this if you can name all three Gabor sisters. In other words, if you’re a woman of a certain age, unless you want to look like her pharmacist cut off her Valium refills, stick to good grooming: a light but thorough maquillage and decent hair.

Same goes for investment portfolios. The stuff you can get away with in your 20s—crazy penny stocks, hot tips, and shares in companies with no earning yet priced for perfection, doesn’t look so cute by the time you’re in your 50s and beyond.

Time diversification is the concept that, given a long enough time horizon, even inherently risky assets like equities mellow out and give above-average returns compared to bonds and cash. Just as no one gets excited by a matte nude lipstick compared to a fuchsia gloss and sparkly mascara, an income-generating portfolio won’t rock anyone’s world. That’s okay. Just like beige, it’s not for everyone.

An all-equity portfolio, the financial equivalent of clumpy lashes, is not only potentially thrilling but also makes good fiscal sense for younger investors with time horizons over 20 years. They can afford the volatility that goes with equities. A market meltdown here, an oversold situation there, are no biggies because, in the distant future when the positions are wound down, good money will likely have been made.

Compare that to someone who is on the cusp of retirement. An all-equity portfolio is still full of chills and thrills but it’s too volatile. Unless the person has another, rock-solid form of income such as a defined benefit plan or a very rich and generous benefactor, there may not be enough time to recover from a market crash before the funds are needed. The portfolio will continue to shrink at an above-average rate to provide income. More chills, fewer thrills.

With yields and interest rates at historical lows, more investors are being driven to participate in the equity markets in order to generate reasonable returns. They’re taking on more risk than they should because their investment style is younger than they are. Fine if it’s only a bit younger. Flashing a bit of leg or tossing your tousled hair when you’re over 50 is no crime—unless the ISIS party bus is parked in your neck of the woods. But it does make you more vulnerable than a similar portfolio held by a younger person who has many earning years ahead.

Just because equities get the lion’s share of media buzz doesn’t mean they’re right for you. One of the boons of being older is knowing which trends to pick up and which to drop. It would be wise to remember Oscar Wilde’s words: “When I was young I thought that money was the most important thing in life; now that I’m old, I know that it is.” 

As for me, I’ll stick with my equities a bit longer but I’ll pass on the clumpy mascara.