It’s hard to do nothing. It’s hard to disconnect in a connected world. If you have children you’ve probably heard them say: “I’m bored, there’s nothing to do!” If you want to see how hard it is to do nothing, turn off everything around you and close your eyes for five minutes. Welcome back. How’d you do?
The most challenging investment strategy is the buy and hold, one based on making few changes to your portfolio over time. You do nothing but sit and wait for your portfolio to perform. This might be easy during a rising market like we’ve experienced since 2009 but how about when it’s falling? It takes courage and conviction to hold your investments during a market rout like 2008.
A buy and hold strategy is boring and it’s certainly not sexy. Tell people you own a diversified portfolio of index funds that you plan to hold forever, and they’ll yawn and roll their eyes. Warren Buffett said that people don’t like to grow rich slowly. As you know, slow and steady wins the race especially if you’ve read the story of the tortoise and the hare.
A long time ago I worked with a broker who told me he periodically bought and sold stocks to give the appearance he was monitoring his client’s accounts. His activity “strategy” benefited him more than his clients. Activity for activity’s sake is not a strategy and it should be avoided at all costs.
Pursuing get quick rich schemes (scams) often end poorly. However, people are attracted to bright lights and loud sounds of hucksters promising high levels of income with outsized gains and low risk. The sheep can’t recognize the wolf. Investors who entrusted Bernie Madoff with their life savings know this all too well – unfortunately.
Investors get antsy when their portfolio isn’t rising. When turbulence hits, they run for the exits. During the first quarter of 2018 investors pulled about $50 billion out of the stock market just before it started rising again.[1]
In a recent study by Morningstar, they found that over a 10-year period investor in US diversified stock funds earned 3.24% less than the funds they owned. If a fund earned 10%, the investor earned 6.76%.[2] They earned less because they moved their money in and out of the funds. A buy and hold investor enjoyed the higher returns and benefited from the long-term trend of the stock market.
From 1926 to 2017 the S&P 500 Index returned 10.2%; staying invested gives you the opportunity to enjoy these market returns. A study on market timing conducted by Dimensional Fund Advisors found that investors who stayed the course earned 9.38% from October 1989 to December 2016. The individual who missed the 25 best days during this period made 3.98%, or 5.4% less than the buy and hold investor.[3]
Of course, there are times when you need to sell your investments or make portfolio changes. Using your funds to generate monthly income or payoff a mortgage is certainly warranted. An annual rebalance of your accounts is recommended to keep your asset allocation intact.
A financial plan can help you improve your investment results and give you the necessary tools to stay invested during rising and falling markets. It will provide you a roadmap on how best to invest your hard-earned dollars by aligning your goals and risk tolerance to your portfolio. Your plan will be your antidote against making poor investment decisions.
Give it a try – do nothing!
The trick is, when there is nothing to do, do nothing. ~ Warren Buffett
May 12, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX. Our mission is to remove confusion, complexity, and worry from the financial planning and investment management process. For more information please visit www.parrottwealth.com.
Note: Past performance is not a guarantee of future returns. Your returns may differ than those posted in this blog and investments aren’t guaranteed.
[1] https://www.yardeni.com/pub/ecoindiciwk.pdf, Dr. Edward Yardeni, May 9, 2018
[2] https://office.morningstar.com/research/doc/_862410, Ben Johnson, CFA, May 2, 2018
[3] Reacting Can Hurt Performance, Dimensional, 10/89 – 12/16. Data provided by Ibbotson Associates.