In his latest Behavior Gap Newsletter, Carl Richards nails that feeling of confusion that comes when we learn first hand that “past performance is not a guarantee of future results.”
Investing isn’t like hiring a basketball coach, Richards argues, but rather like planting an oak tree: “You never plant a tree and then pull it out every time the wind blows just to check the roots.”
He also quotes this gem from Warren Buffett: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”
Why We Should Do Less With our Investments
In his book Wise Investing Made Simpler Larry Swedroe makes a similar point using a study conducted by a trio of academics. Edwin J. Elton and Martin J. Gruber of New York University, and Christopher R. Blake of Fordham University, examined 43 401(k) plans from 1994 through 1999.
Over those five years, the 401(k) plans added 215 new fund options for participants and dropped 45 funds from their plans. The funds added had a strong track record. Those that were dropped had poor recent performance.
The professors soon discovered that the new funds promptly underperformed those that had been given the heave-ho.
That brought the overall quality of the offerings down. Making matters worse, participants in the plans constantly chased performance by shifting money into last quarter’s top performers, the study notes.
Give Your Money A Chance To Grow
The argument Richards, Swedroe, and others make is simple. Having put thought and effort into setting up their investments, investors need to give them a chance to grow. That doesn’t mean you can’t appreciate their beauty and even check in on their performance now and again, but successful long-term investing requires patience.
If you have ideas for setting the right balance between enlightened remove and dangerous neglect, please share them in the box below.
Understanding your investing profile to achieve your financial goals starts with a few simple questions. The Investor Questionnaire, by Folio Investing, will help you understand your investment time horizon, investor profile and level of risk.
The funds in the retirement plan is critical but you also need to have an asset allocation strategy.
We surveyed over 800 plans and found:
Asset Classes Number of plans
Three 463
Four 181
Five 109
Six 30
Most plans have only three asset classes. I think it is understood and we have demonstrated that more asset classes deliver better returns than better funds (although you want both).
We should be reviewing the asset class strategy as well as the individual funds.
Good point Simon. It seems like there’s a fine balance that any plan sponsor needs to strike today. You need enough choices to build a good portfolio, but when given too many choices, we tend to freeze and do nothing. I was reminded of that while recently watching this TED talk by Barry Schwartz, author of The Paradox of Choice (link: http://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice.html). In it he mentions another academic’s finding that for every 10 funds offered by a plan, the rate of participation dropped 2%. So if you offer 50 funds, 10% fewer people would participate than if you offered 5. In his words: “Paralysis sets in.” I suppose the trick is to make sure your choices aren’t all shades of the same asset class but offer a true variety.
[...] Relax: Doing Less with Your Investments from Portfolioist [...]
[...] Relax: Doing less with your investments – The Portfolioist [...]