Don’t Do Something. Just Stand There!

Sisters Forever

You learn a lot by the discipline of reading old news.

Most of financial news is just noise. You ought to ignore it when it is published, and if you practice reading it with three months of hindsight you can train yourself gain the discipline of recognizing its foolishness in real time.

I’m commenting today about a great article by Mitchell Tuchman published five months ago. January, 2014 had just ended with the the Dow down 4.4%, the S&P 500 off 2.9% and the Nasdaq composite down 1.28%. Here is how Tuchman begins the article:

The headlines pulled no punches after a poor January and a tough start to February for stocks: “Brutal” said one, “horrific” said another.

The natural human compulsion in such times is to take action. Yet before investors really absorb such headlines, the time for action will have passed. And that’s the problem.

The solution, to cite Vanguard Group founder John Bogle, is to do nothing at all. While that sounds like a weak strategy, it’s the only strategy retirement investors should consider.

Tuchman goes on to quote a column by Bogle:

While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!’

Most mutual fund investors underperform the very mutual funds they are invested in. Yes, they underperformed the mutual funds they invested in by 1.5%.

They did this because they moved out of funds after they went down and they moved into funds after they went up.

Just to be clear, 1.5% is huge. For an extra 1% over your working career you can retire 7 years earlier or 50% richer.

Now I am sure that as the markets bounce around, 1.5% doesn’t seem like much. I’ve seen investors tell me that fees in excess of 2.5% don’t matter at all. But in the midst of all that financial noise, it is better to have a disciplined approach of looking at these type of trends and getting that extra 1.5% for not moving in the wrong direction.

Even better is the 1.6% that could be gained by rebalancing into asset classes that have done poorly and out of the ones that have done well.

Doing something to ease the pain by selling what has gone down loses 3.1% (1.5% + 1.6%) over rebalancing and buying more of what has gone down.

Don’t do something stupid. And if you must do something, make it rebalancing.

Don’t ruin a beautiful moment or a beautiful asset allocation just because you think something needs to be done.

Photo by John McDonnell used here under Flickr Creative Commons.

About the author

Matthew J. Illian, CFP®, AIF®

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