The Most Effective Way to Research Your Investments (Plus the Launch of my Delicious Account!)

Singapore’s been encased in a shroud of haze for the past week. Because I’m a total wuss when it comes to poisonous airborne particles, I decided to stay indoors, strap on a hardcore N95 mask that made me look like Bane from Batman, and read all the email I got from last week’s article in the Sunday Times.

First of all, let me say that this is frickin’ awesome. I love hearing from you guys and responding in any way that I can, so please keep the emails coming!

The Psychology Behind Not Starting

I observed something interesting in the emails I got this past week: An overwhelmingly majority of readers emailed me with questions about the nuts and bolts of investing – What is an ETF? Where can I invest in one? How do I buy one? Which buttons do I press? The underlying message was this: “I want to invest in ETFs like NAO. Show me how!”

Here’s the thing – I could write a step-by-step guide on how to buy your first ETF, but if you’re not convinced about why you’re buying that ETF in the first place, you’re not going to stick with it for long.

And no, “because it’s a good investment!” doesn’t cut it. If you can’t articulate exactly why you’re buying a certain investment, it’s like being lost in a PSI 800 haze. You wont have any direction on where you’re going, and anything you do will probably be pretty hazardous.

There’s a huge psychological advantage in knowing why you’re choosing a particular investment. As Cal Newport writes, “Our minds have evolved to be fantastic plan evaluation machines.” If you try to take on an investment plan before truly convincing yourself that it’s a good idea, your brain will subconsciously shoot down your plan, and stop you from getting motivated.

It’s just like finding a job – if you haven’t convinced yourself about what kind of job you’re looking for, you’re probably not going to be very motivated in your job hunt. But once you have a crystal-clear idea of what your dream job is, it becomes way easier to tailor your resume, focus your research, and target your interview answers.

Find a focus first, and then it’ll be much easier to get started.

Apply a Testing Mentality

But how do you find a focus when there’s just so much information out there? It’s almost impossible to figure out where to start.

Here’s where the idea of testing – one of the central tenets of cheerfulegg – will come in really useful. Stop trying to figure out which is the “best” type of investment, because there isn’t one.

Instead, start from a really high level – what are the different investing styles available to you today? There’s indexing, value investing, swing trading, arbitrage, options trading, forex trading, etc.

Here’s how to test them: Expose yourself to as many different styles as possible, and then pit the ideas against one another to see which one(s) suit YOU best.

Don’t get too bogged down by the details – instead, try to focus on why an author is arguing for a certain type of investment.  Are his arguments valid? What assumptions does he make? What are the risks involved? Which style suits your personality better?

I outline the vigorous testing methodology that I use for my own investments below. Follow it, and systematically reject the ones that don’t suit you. Do this consistently for 2-3 months, and you should end up with a much clearer idea of which investing style you should focus on. Here’s how to do it:

1. Start by reading 1 good personal finance book

Books are pretty much the best places to start learning about any topic, because they’ve got enough room to give you some good background if you’re a beginner, before delving really deeply into a subject. Don’t spend like 2 hours trying to decide which book to get – start with any one that looks interesting, or check out my Reads section for some recommendations.

When you read, don’t worry too much about the details of a certain definition or statistic. Instead, try to get a broad, high-level understanding of why the author is advocating that particular investment style.

2. Test it against 2-3 opposing articles

Next comes the really important part. Once you’re done with the book, read 2-3 articles that entirely oppose what the author of the book was arguing for. If you just read a book about “Why You Should Invest in ETFs”, then Google “What are the risks of ETFs?” and read the first 3 articles that pop up.

Compare the two arguments. List out the underlying assumptions. Which ones apply to you, and which ones apply to a 60-year old grandpa who’s retiring in 2 years?

This is essentially the heart of testing ideas out. Compare 2 opposing arguments, and then make your own decision about which one applies to you best.

3. Rinse and repeat for 2 more sets of books and opposing articles

Here, you should be looking for books that write about a completely different investing style from the first book you read. The idea here is to test out as many styles as you can, in order for you to make an informed decision in the space of as much information as possible.

For example, when I first started researching, I was really interested in technical analysis so I read a couple of books on it. I then moved on to study swing trading, and finally finished off by reading academic papers on passive investing. Along the way, I was constantly reading articles that opposed the various investing styles I was researching.

Beat the Crowd by Starting Now

If this sounds like a lot of work, well, it is. Very few young people would be willing to do it, because most young people have better things to do like watch Jersey Shore. Most people won’t even think about investing until their late thirties and forties. By then, they would’ve missed out on precious years of investing experience, forgoing the chance to retire early.

The good news is, you can beat the crowd by starting early. Start now even if you’re not thinking of investing in the next couple of months. You’ll emerge from this exercise with much clearer vision through the haze, giving you an immediate edge over everyone else.

A Tool to Help You Get Started

I love helping my readers out. I know that good personal finance blogs and articles can be pretty hard to find sometimes, so that’s why I started a delicious account.

Delicious is essentially a bookmarking service where I can save all my favorite links in. I’ll be constantly updating it whenever I come across an article that I’ve found to be particularly useful, and everything I save will be easily accessible to you.

You can access my delicious account at delicious.com/lioyeo. (For future reference, you can find it under my Reads section as well. This also replaces the “What I’m Reading This Week” series that I used to post).

If you’re following the testing methodology I outlined above, I highly recommend that you sign up for your own delicious account. It’ll be immensely useful for tagging links that you’d like to come back to.

What are your thoughts on applying a testing methodology to researching your investments? Is it useful, or just way too much work to expect? Leave a comment below to let me know what you think. I read every one.