The Globe and Mail, Report on Business
Published January 12, 2007

The YWCA that I go to is always busier in the early part of January. This year is no exception. As part of our New Year's resolutions, we all start the year determined to get in better shape.

Given how low the success rate is on these gym resolutions, it's probably not a good idea to relate our workout regimen to the investing process, but I can't resist. Many of the challenges we experience when we go to the gym are the same ones we face when managing our investment portfolio.

It's not a sprint, it's not a marathon... it's a bloody ironman. People often hire a trainer with the goal of getting back into the shape they were in when they were in their 20's. And they want to be there by the time they head to Florida in March. Well, it doesn't work that way for training or investing. In both endeavours, the key variables, sweat and risk, are multiplied by a second variable, time. It takes a long time to get in shape and accumulate wealth.

Unrealistic expectations are dangerous. If you don't have a good understanding about what's ahead and you're looking for instant results, there's a risk that you'll be easily discouraged. Too often trainers and financial advisors are guilty of overhyping their solutions. It's part of the sales pitch. Unfortunately, it reduces the chance of success. To attain a difficult goal, human beings need encouragement. If expectations are sky high, there is little chance of positive feedback along the way.

Beware of trying to do too much, too soon. For the casual athlete, the consequences of this are obvious. For an investor, trying too hard to achieve short-term gains will likely translate into chasing past performance (whether it be a stock or mutual fund) and spending too much money on commissions and fees. Unlike athletic training, where charging out of the gate has no chance of success, a few investors may get immediate results, if they're lucky. But it's important to recognize that it will be a result of luck. Short-term investment results are totally random and unpredictable. In all the studies I've seen, individual investors have a perfect record when it comes to chasing trends. They always get it wrong.

Both exercise and investing are subject to lots of fads. Someone always has a quick fix. They say you'll attain the results you want with a lot less effort, or risk. In both cases, the marketers are blowing smoke. There is no free lunch, whether the currency is sweat or risk, and there is no substitute for time. The current fad, which has gone on for too long, is principal protection. There are many of these products that allow you to buy risky assets, like stocks, mutual funds and hedge funds, with no chance of losing your capital. Higher returns with no risk. Go figure. If we go back further, we'd find hybrid income funds and clone funds, among others, tucked away in the basement beside the NordicTrack and Bowflex. Fads are more dangerous to investors than they are to exercisers. Buying the latest exercise gadget wastes a few bucks and clutters up the house. Chasing an investment fad can cost considerably more and use up valuable time.

No pain, no gain. This age-old sports expression sums up the training analogy. The infomercials tell us that we can get in top condition by exercising three times a week for as little as 20 minutes. I don't buy it, nor should you when it comes to investing. The equivalent of physical discomfort in investing is risk, which the professionals define as short-term volatility. Taking risk comes from owning long-term assets like stocks, bonds and real estate. Investors cannot achieve attractive long-term returns without having their portfolio bounce around a little. If they want the good times, like we're experiencing now, they must be willing to live through the tough patches.

As I noted earlier, the odds of success at the gym are low. After a week or two it gets harder to drag yourself out of bed and brave the winter weather to get to the gym before work. The success rate should be better for investors, however, because after the initial work is done, there's very little to do. As opposed to physical training, you can be a disciplined investor while lying on the couch and eating chips with the Raptors game on the tube.