There is a misplaced psychology among active investors and many advisors that they must always be doing something with their portfolio. It’s the notion that activity leads to profitability or that instant gratification is a requirement of sticking with any process for more than a few months.
This emotional response is compounded when you are paying someone to look after your account with very little physical action – i.e. trading. It’s easy to think to yourself that “I don’t need to pay this person to sit there, I can do that myself for free”.
Yet, often the most appropriate move for your money is doing absolutely nothing. Let me give you some examples.
- If you are invested in a solid mix of stocks and bonds that are continuing to meet or exceed a reasonable benchmark– do nothing.
- If you just hired someone to manage your portfolio and you keep second guessing every move, they make – do nothing.
- If the current market signals that aren’t conducive to new opportunities or bear heightened risk – do nothing.
- If you are just starting out to learn a new strategy (i.e. ETFs, options, alternatives, etc..) and are focused on education over earnings – do nothing.
One of the mistakes that I often see investors make is being overly active with their portfolios. They are after quick profits over consistent results. They spend five months researching a new flat screen TV, but hear one 60-second commercial for a gold mining stock on the radio and put their entire account to work there.
They miss years of a trend in action and then want to be as ferocious as possible in making up for lost time. There is no making up for lost time.
Successful investing is an extremely long process that requires infinite patience. Jumping around to different strategies, trying to time every up or down move in the market, or simply trading for the sake of boredom won’t get you anywhere. Those follies will consistently send you chasing your tail for elusive profits that never come.
The reality is that your advisor should not be overly active either. You are paying them to stick with a disciplined process, keep you emotionally balanced, and allow you to accomplish other tasks.
If you know you have hired a good one, let them do their work with as little interference as possible.
It takes time for the fruits of inaction to coalesce into exceptional opportunities or results. The truth of the matter is that there are only a handful of days every year when an important decision must be made. It’s on those days where you either must be in the seat yourself or trust someone to do it for you.
It’s worth clarifying that “do nothing” only applies to those who have invested positions or the intention to put money to work in the market.
Those who are 100% cash need to do something to create momentum towards reaching their financial goals. Getting over your fear of timing or becoming familiar with a reliable investment philosophy is a critical component to compounding your wealth.
The bottom line is that decisions in your investment portfolio must be made with a carefully measured list of pros and cons. Each change can have ripple effects that impact your returns and risk profile. Sometimes the best path forward is to do absolutely nothing until there is reasonable evidence for action.
Until next time,
David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.