If It Ain’t Broke …

It happens every few years and comes in all shapes and sizes. I can see it now; people winding up to make one of the great mistakes of investing. This time, it comes on the heels of modest (a.k.a., nil) returns of the last 12 months or so.

In the wake of the adrenaline inducing, roller coaster recovery of the last six years, investors are looking at their portfolio statements from any one of the last few quarters and experiencing the disappointment of seeing their overall portfolio value remain effectively the same. While we know intellectually that investment returns have always and will always come in bunches, it doesn’t ease the relentless urge to make a change or do something.

We are prone in times like this to say:

If my portfolio is not …

  •  Growing at the rate I’ve enjoyed for the last few years
  • Growing at the same or better rate than some arbitrary (albeit unrepresentative) benchmark at the moment
  • Growing and/or throwing off enough income for my living needs this year

Then

A.) Something must be wrong

… and …

B.) Maybe I need to make some changes.

 

DD_activity-vs-results

Source: Behavior Gap

 

While it is prudent to scrutinize your portfolio returns and periodically seek a more optimal asset mix, changing a well-constructed, diversified portfolio because of disappointing, short-term results is like trying to fix something that isn’t broken.

Our modern day “culture of immediacy” is one in which instant stock quotes and round-the-clock “news” hyperbole continue to sensationalize short-term events and reinforce the message that a change is imperative.  Its effect on investor behavior is evidenced by higher stock market trading volumes and shorter holding periods.

My advice. Stick to an approach based on logic, reason and empirical evidence.  Know that there will be years when your return is modest, nil or even negative – it doesn’t mean that your portfolio needs an overhaul, or tinkering.  It’s just how markets work.

  1. We have no control over the timing and sequencing of returns.
  2. Recent results don’t necessarily tell us anything about future or even average returns.

At the end of the day, a diversified, risk appropriate portfolio is something you should always maintain.  If you don’t like the last period’s results, recognize that it doesn’t suggest anything is wrong with your portfolio mix. To the contrary, you may have a portfolio that is well positioned to attain more attractive returns in the days ahead, if you can manage to sit tight!

 

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