Don’t Just Do Something, Stand There

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You might be familiar with the quote from the title from a few years ago. It is of course a play on words that I’ve seen several people use. I believe I first read it from Jack Bogle and as it relates to investing it is of course about not overtrading in response to news or other price-moving factors.

The knee-jerk reaction after the Brexit news broke is a perfect example of this. As the news broke on the night of June 23rd and the futures plummeted I tweeted whether the pre-Brexit close of 2113 for the S&P 500 was just a few days from coming back with the hashtag sometimesmarketsoverreact. This is an idea we’ve been discussing for years here. I tweet or blog the same sort of comment in the middle of these puke downs about fast declines tending to snap back quickly every time. I’ll do the same thing in the next one and of course there will be future puke downs.

Last week I stumbled across Just Don’t Do It by Tim Hanson via Abnormal Returns which is about the benefits and potential success by doing nothing. The money quote;

Second, define success differently. The financial industry standard in investing is to define success by measuring return against a benchmark, goading investors into trying to beat the market over shorter and shorter periods of time. But the fact is that most investors who try to beat the market are putting the nail in the coffin of that very aim.

I would add several points while at the same time tweaking the sentiment.

A point that I have made many times before that I believe is a crucial building block of understanding is that if you build a properly diversified portfolio and have an adequate savings rate and do no trading, you have a very good chance of having enough money when you need it (presumably retirement). The idea here is that the average annual returns that are going to occur regardless of what you do and will at the least, get you most of the way there (assumes not repeating truly self-destructive behaviors which might be a big assumption).

With that building block of understanding, the things that most people do then will hopefully help numerically at the margin to improve results either nominally (adding alpha) or in risk adjusted terms (smoothing out the ride). But there is more to it than the numbers which is why never doing anything is not practical.

The better idea is doing less. The typical advisor or do it yourselfer doesn’t need to try to trade a week or two long 4% dip; doing less. There are real events that occur that need to be addressed. A fixed income portfolio that yields 0.80% is an example. I think being diversified means having some exposure to the low yielding parts of the market, there must also be exposure to segments that offer more yield, these segments are there but they need to be researched and then implemented (this probably should have happened by now). Occasionally equities go down a lot and it is at the lows after these declines where the greatest likelihood of self-destructive behavior exists.

We’ve written countless times about warnings signs for large declines. Heeding them to miss the full brunt of a large decline and add alpha for years on an annualized basis. While not infallible, things like a breach of the 200 day moving average, the 50 day going below the 200 day, yield curve inversion and the 2% rule can help in this regard and there are others (a sector growing very large within the S&P 500 Index as one more example). This is where things like funds that sell short, alternative strategies and gold all used in moderation can help avoid that full brunt.

Hanson’s idea of not benchmarking is a good one. Benchmarked results won’t mean much for anyone who doesn’t have enough money when they need it. Someone who is 95% of the way there at age 60 needs to do different things than the 55-year-old who is 40% of the way there and again, far more important than benchmarked results.

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