Warren Buffett once said “Lethargy, bordering on sloth should remain the cornerstone of an investment style.” Unsophisticated investors tend to adopt this investment strategy more than knowledgeable investors who can try to be too clever when markets are volatile.
Take Rachel for example, who came to me looking for investment advice. She told me she had no experience with investing in the market but as the conservation went on, she told me that she had being paying into an AVC plan for the last 25 years. When I pointed out that this was investing, she said it was just something that she paid into every month. She looked at the value once a year when she got sent her benefit statement and hasn’t changed the fund since she started. When I asked her if she got nervous when the dotcom and the credit crunch recessions resulted in massive falls in the value of her fund, she just shrugged her shoulders and said she presumed the markets would come back. Which of course they did. She has accumulated a sizeable pension pot over the years without doing very much and without any worry.
Then we have Michael, who likes to study the market. He made a killing on Tesla stock and other smaller companies that have shot up in value. He’s also lost money on other shares that he doesn’t talk about them too much. His pension has been sitting in cash for the last 3 years as he believes the market is overpriced and he is going to pounce when there is a crash. In that time, the S&P 500 has returned 61.53%. As the price goes up, his argument becomes more valid because to buy today is 61.53% more expensive than 3 years ago. The gains he has lost don’t factor.
When we invest, we can try to be too clever, trying to avoid the dips and only enjoy the rises. Timing the market is an incredibly difficult thing to do and is more luck than skill. It cannot be done with success consistently over time. When you invest, you have to accept the rough with the smooth. Missing out on the best days while you sit on the sidelines can cost you in the long run.
Looking at your portfolio all the time will make you anxious. In this graphic provided by Finametrica, we can see that someone that looks at their portfolio every month only sees it rising in value 34% of the time. Whereas the Rachel’s of this world sees the same portfolio raising 66% of the time. Who do you think is happier with their investment? And who is more likely to get anxious and make changes to their portfolio?
As I have repeatedly said, invest in quality, pick a portfolio that suits your timeframe and your tolerance to risk and just let it do its thing. Sometimes it will be up, others it will be down but over the long term you will make money…unless you start messing around with it!!
30 August 2021