Having covered Sin 2: Pride in the previous article, I will be covering on Sloth in today’s article.
Sin 3: Sloth – Taking the easy way
Ever felt that moment of laziness, that time when you wanted to take the easy way out. Well, in investing, there are few short cuts. Understanding what you are investing in means doing the hard work even though it is rarely the quickest way. Only when we have done our due diligence can we truly rest in peace. Imagine if a company you invested in dived 50% because you decided to skim through the footnotes of the company.
Perhaps you heard of the latest investment idea from a broker. Would you just blindly follow their advice or check the company’s fundamentals to ensure that the company is financially sound and that what you are being sold is not just some latest trend or story?
Overlooking Costs
Perhaps we decide to just invest in mutual funds, allowing a fund manager to manage our money instead of doing the grunt work of researching into companies, which I admit is a much more tedious task. Does that mean we truly need not do any homework? Investors often do not pay attention to details and in this context, I am referring to a fund’s expense ratio.
To quote James Choi, an Associate Professor of Finance at Yale School of Management, investors are wooed by a fund manager’s name or recent performance, and fails to look at the fund’s expense ratio before buying in. Rather than buy a cheap index fund that mimics a broad market index such as the S&P 500 with an expense ratio of approximately 0.05%, investors will buy one managed by a professional that charges a much higher fee. However, numerous studies have shown that buying more expensive funds tend to underperform less expensive ones.
While there is nothing wrong opting for a easier route – allowing a fund manager to manage our money for us, we cannot slacken one bit. Ultimately, we are the owners of our own money and we have that responsibility to pay attention to our own money because if we don’t – no one else will either.
