You might be doing more harm than good.
During a visit to Motley Fool headquarters, Vanguard founder and investing icon John Bogle once described how he thought investors should interact with their investments. To paraphrase, Bogle suggested that average investors would do better by adding money steadily each month and never looking at their investment statements until it was time to retire. The investors who do so, Bogle argued, would be quite pleasantly surprised by how their money had grown while they weren’t paying attention.
Bogle’s idea might sound extreme, but it brings up an important point. We can often do more harm than good when we tweak our portfolios after reading the news or looking at statements. We have a tendency to chase performance -- piling into funds that have performed well, only to see those funds subsequently sputter. We don’t diversify enough. And we react emotionally to market gyrations. This penchant for tinkering is a proven drag on performance. According to Morningstar, the average mutual fund had earned 7.3% annualized during the 10-year period ending in 2013, while the average mutual fund investor had earned only 4.8%.*
If you suspect that your “tinkering” might harm your returns, you can take solace in knowing that behavioral-investing errors are correctable. Changing your investing behavior won’t be easy, but you don’t need to be a stock market genius to do it. In fact, you may have received all the advice you need when you were a teenager. Anyone who ever had a pimple in adolescence probably recalls being told to “stop picking at it.” The same advice could apply to your portfolio.
New York Times columnist and financial advisor Carl Richards put it eloquently in his book The One-Page Financial Plan:
“Would you ever plant a tree and then go in every month and dig it up to see how the roots are doing? Well … maybe some of the impatient among us might be tempted to, but all of us know we need to leave the tree alone for it to grow. The same is true of an investment plan. When done correctly, investing should look a lot like growing a giant oak tree.”
I’ll admit, fighting the temptation to “pick” at one’s portfolio is difficult. Part of the attraction of investing comes from being able to watch your wealth grow. I know that when the market soars or drops, I often have to purposefully do nothing. One way to do that is to remind myself that I’ve bought and sold many stocks and funds in my career, but I can’t point to any specific move as being overly successful. In my experience, selling out of a stock to buy shares of a different stock has rarely worked. The only thing that has worked for me is buying regularly and holding.
Once, I was fortunate enough to hold shares of a stock without knowing it. A few years ago, I discovered I was owed some stock from an insurance company I had a policy with as a child. The company had demutualized around the time I left for college, and those of us who had policies were given shares of company stock. As a red-blooded college kid, I wasn’t paying attention to that type of thing, and the notice about my shares eventually got lost in the mail. It wasn’t until I was in my late twenties that, on a whim, I searched one of those “missing money” websites. Weeks later, I’d learned I was entitled to about $7,000 in stock that I never knew I’d had. Bogle was right – I was pleasantly surprised.
I often wonder what would have happened if I’d learned of my shares when I was 18 instead of 28. Knowing how impulsive twentysomethings are, I can’t imagine that money would have grown as well as it did when I didn’t know about it. I would have “picked” at it constantly, probably racking up commissions and tax bills in the process. I know the rest of my investing career won’t be as easy, and that it will continue to require actively trying to do as little “picking” as possible. It’s a hard lesson to remember, especially in an age where we’re inundated with round-the-clock advice, but sometimes the best thing you can do for your portfolio is absolutely nothing.
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*The hypothetical example is meant to demonstrate a basic compounding principal. It does not represent or predict the performance of any investment and does not take into account taxes, fees or charges associated with an investment. There can be no guarantee that any strategy will be successful. All investing involves risk, including potential loss of principal.