Glide path is a metaphor for how your asset allocation changes as you near your retirement date.

Suppose you start investing at 20 and wish to retire at 65. You have a long time horizon before you retire. This means you can afford to take greater risk to produce greater gains. Thus, the stock/bond split will weigh more towards stocks. As you grow older, it’s prudent to minimize risk of your investments, so your stock/bond split then will weigh more towards bonds.

Interested in finding out what stock/bond split you should be using? We illustrate the glide path in our awesome stock/bond split demystified comic.

Do you own an item that has greater value to you than it would cost to acquire that item again? That’s the endowment effect, and it can cause you to make suboptimal investment decisions.

For example, let’s suppose you own $5000 worth of stock in company A with below average potential. Then you learn about low-fee index funds (and why they are great). Because of the ownership bias, you value the stocks you bought at company A at much higher valuation than the $5000 you paid for them. Thus, you decide to hold on to these suboptimal stocks and forego better investment opportunities like low fee index funds.

Pro tip: Analyze the holdings of your portfolio and for each holding ask yourself – would you still buy this holding now or invest in something better?

It’s easy to think of investing as a high performance sport, something that requires immense skill, velocity and snap decisions – first mover advantage as it’s called. This view certainly makes the endeavour sound very exciting. But, is it productive? Does more activity translate into better performance?

As Bill Schultheis discusses in his book, The Coffeehouse Investor:

… less than 10 percent of the millionaires of the United States consider themselves ‘active’ traders, and 42 percent of the millionaires of this country make less than one transaction per year in their investment portfolios.

Perhaps there is a lesson to be learned from our nation’s wealthiest investors: passive investing strategies deliver more stable returns in the long run, minimize portfolio risk and help you reach your long term financial goals faster.

You work hard month after month, year after year but your finances seem to be at a standstill. You argue that your savings should be increasing, but somehow at the end of the month there’s hardly any money left to save. What’s going on? What’s your paycheck going towards?

In short, it’s those pesky costs. But which costs?

Here’s a simple technique:

1. Write down every single purchase you make (groceries, phone bill, etc.) for at least one month.
2. At the end of the month, go through the purchase list and for each item ask yourself: does this purchase contribute towards my financial/life goals? If the answer is no, add that item to the potential savings list.
3. Add up all the items from the potential savings list. That’s how much you could be saving every month.
4. Finally, and this is the most important part, make an effort to forego unproductive purchases.

Saving and investing go hand in hand. Make an effort to monitor your spending habits. The more you save, the more you can invest, and the faster you can reach your financial goals.

You spend $100 on a concert. But, on the day of, you find that it’s cold and rainy. You feel that if you don’t go you would’ve wasted the money and the time you spent in line to get that ticket. This is an example of sunk-cost fallacy. In either case you’ve paid the price of the concert. By attending you incur an additional cost of wasting your time at the concert.

Applied to investing, it may be tempting to hold on to a bleeding stock when the best decision would actually be to sell it. Better yet, you can prevent yourself from committing sunk cost fallacy for particular stocks by simply investing in index funds.

Disposition effect is the tendency of investors to sell shares whose price has increased, while keeping assets that have dropped in value. This means that as an investor, chances are high that you’re cashing in your winners too early and selling your losers too late. The phenomenon is not exclusive to individual investors. Andrea Frazzini describes in his paper, The Disposition Effect and Underreaction to News, that the effect exists in the trading of mutual fund managers as well.

Since index funds are unmanaged, unlike managed mutual funds, their performance doesn’t suffer from disposition effects. This is all the more reason why you should invest in low-fee index funds.