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As of the end of 2015, there were over 15,600 mutual funds, 11,000 hedge funds and 2,100 ETFs…[which] account for almost 50% more…than there are individual stocks and bonds. The paradox of choice makes it extremely difficult for investors to wade through this sea of complexity, but it also increases the temptation to make changes to a portfolio. People have a hard time sitting still in the face of this sheer number of choices, even when there are proven benefits from inaction with your investments. [Let me explain.]
The comments above and below are excerpts from an article by Ben Carlson (awealthofcommonsense.com) which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!)
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This past week the Wall Street Journal profiled Steven Edmundson and Ken Lambert, who oversee the $35 billion Nevada state pension fund. They keep things fairly simple in terms of their investments. They don’t have a huge staff or a large research budget but they do have some of the best returns out of all pension funds over the past 1, 3, 5, 10 and 20 years because they understand the importance of inaction.
Some highlights from the story:
- The Nevada system’s stocks and bonds are all in low-cost funds that mimic indexes. Mr. Edmundson may make one change to the portfolio a year.
- “Doing nothing is harder than it looks,” says Ken Lambert, Mr. Edmundson’s predecessor and only outside investment-strategy consultant. Harder, he says, because of the restraint needed to practice inaction.
- Even Mr. Edmundson can’t resist studying investment strategies. “I spend a lot of time researching things we ultimately don’t do.”
Plenty of pension funds would have much better performance if they practiced a similar low-cost, long-term approach but that’s not the biggest takeaway here as far as I’m concerned. This goes beyond indexing or buy and hold. This has nothing to do with active vs. passive funds — it’s high activity vs. low activity.
This group still had to choose their asset allocation. They’ve had to make some changes to that allocation over time, but they’ve also decided that taking action for the sake of taking action is not a wise decision. This is harder than it sounds.
That dopamine hit we feel when we take a gamble and it pays off can be too intoxicating for some to ignore, so it can be more comfortable to make change after change. We have a really difficult time sitting on our hands and saying, “I don’t know” or “Let’s be patient and see what happens” in many situations.
Not only is there a wide range of investment products available but the markets are constantly tempting us to tinker and make wholesale changes in an effort to guess what will happen next…[In addition,] professional investors often make unnecessary changes to justify their fees, find comfort in the crowd, prove their intelligence or show clients that they’re doing something with their money.
When everyone around you is picking new stocks or funds and churning their portfolios by trying to guess where interest rates or corporate earnings are headed next it can feel lonely to stick with a more inactive approach.
I’m not saying you should never make portfolio changes or trades. It’s not about doing nothing for the sake of doing nothing; it’s about doing nothing in those times when it will most likely help you avoid making a huge mistake.
There needs to be a good reason for every move you make in your portfolio. Successful long-term investing is about learning to say no over and over again by developing a filter that helps you turn down more investment ideas than you accept.
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