Your Most Important Investment Decision Is Knowing What You Don't Want

Do you want to spend your time picking stocks, or do you simply want your money to grow?

Do you want investing to feel exciting, or would you rather it be boring so you can spend your time enjoying your life?

Stock picking and timing the market are characteristic of active investing. For years, there has been plenty of literature on active and passive investing.

But I'd like to offer another perspective.

Passive investing isn't really passive. You still have tons of decisions to make. It's about deliberately choosing which decisions not to make.

You are still making decisions, and some of the biggest investment decisions you will ever make happen before your first purchase.

For instance, deciding to outsource is an active decision. You decided to trust a money manager. You believe that your money is better in their hands than yours.

Think about it, it's a very active decision.

Investors often start by asking, "What do I want?"

What returns do I want? What should I buy?

But perhaps it is much easier to ask:

"What don't I want?"

I don't want to place a trade every month.

I don't want to follow the market every day.

I don't want to make a decision every time the market falls 10%.

Once you have a bunch of these "I don't wants", they start becoming the pillars of your investor behaviour and decisions.

Maybe you realise you don't want to pick stocks. So you buy an index.

Maybe you don't want to decide when to enter the market. So you automate your investments every month.

Maybe you don't want investing to occupy much of your life at all. So you outsource to someone.

Maybe you don't want to pay high fees. So you don't buy an ILP and hire a fee-based advisor.

These are not the absence of decisions.

You have deliberately decided which decisions you don't want to make.

So I'd argue, knowing what you do not want is much more important than figuring out what you want.

Is passive DIY investing what you want?

Suppose you've gone down the path of DIY. You'll probably be researching which index fund to buy.

But did you just sign up for a job you didn't ask for?

DIY investing is a job on its own! That is why we DIY investors can cut out fees.

Passive investing doesn't make decisions go away. You still have to decide which index to buy.

You could buy the S&P 500, MSCI World or Russell 1000. But did you know even the S&P 500 has variations? There are market-weighted and equal-weighted versions of the S&P 500. Each of them reflects a different view.

The very fact that you are buying into the S&P 500 means you have chosen to have most of your money invested in large US companies. If you buy a global index, you are choosing not to make such a big bet on any particular country. If you buy the Nasdaq, you are expressing yet another view.

Every index is built according to a set of rules, and choosing one means choosing which rules you want to follow.

I believe many investors don't understand the rules they have subscribed to.

Isn't that scary?

Then you have to decide how much to invest

Once you know what to buy, there is another question. How much to buy?

If you only need to invest $2,000 per month to retire, should you invest $3,000 because you have extra?

Should all your money be in equities, or might you want some cash or bonds?

In finance, professionals call this asset allocation.

Just think of it as a fruit basket. Do you want your basket with only apples or a mix of everything?

This is one of the most important "decisions" you can make, deciding the asset classes.

A person who invests 100% in a global equity ETF is going to have a very different experience from someone who puts 60% into the exact same ETF and keeps the remaining 40% in fixed deposits.

They own the same investment. But they don't have the same basket.

Asset allocation will be one of the biggest active decisions you will ever make.

Then, are you going to fix your investment amount or percentage?

Two people can own exactly the same ETF and still have completely different investment strategies. One person invests 10% of his monthly income into it. Another invests $1,000 every month.

The guy who sticks to 10% will see his investment amount grow together with his income, perhaps from $500 to $1,000 to $2,000. The guy who decides on $1,000 stays at $1,000.

Same ETF. Same idea of "passive investing". But over time, the outcome can be very different because of one decision made at the start.

You also have to decide when to invest

Imagine you have $100,000 sitting in the bank and you have already decided what you want to buy.

Do you invest everything today? DCA over the next 12 months? Or wait for a correction because the market looks expensive?

Even if your answer is, "I don't care, I'm just going to invest everything today because I don't believe I can time the market," you have still made a decision.

You considered the alternatives and decided that market timing isn't a decision worth making.

I think that's quite different from making no decision at all.

The same applies when you invest regularly. Do you keep some cash aside to buy more when markets fall? Sell some when a part of your portfolio becomes too large? Or simply continue regardless of what happens?

When you still have to make decisions like these, does "passive investing" really free up your life?

And then there is behaviour

This is probably where the idea of passive investing becomes the most interesting to me.

Buying an ETF is easy. Holding it when everything is falling is another matter.

You can say that you're a passive investor today, but what happens when the market falls 20%? What about 30%?

Do you continue investing? Or will you say, "Let's wait it out, might drop further."

You can have the best passive portfolio in the world and still end up with a terrible outcome because of your own behaviour.

For many investors, I suspect getting these few decisions right probably matters far more than choosing the perfect stock. And quite frankly, accepting the market return will allow most investors to live a very comfortable life.

And maybe that's what passive investing is really about.

It doesn't mean, "I make no decisions."

It means, "I've deliberately decided that certain decisions aren't worth making."

I'm choosing not to pick stocks because i want to spend my evening with family

I'm choosing not to time the market because i want to keep my attention on what matters

Those aren't the absence of decisions. Those are decisions.

Every investor has an investment process, whether they realise it or not.

Active investors generally believe they can add value by making more decisions. Passive investors believe they can add value by making fewer of them. They save their decisions on what matters

We are all actively investing, just how active.

For investment to work for us and not the other way. We ought to be clear with what we do not want, and hence knowing which decisions are actually worth making.