Being Right or Making Money
I've seen how the argument gets presented:
“Mr. & Mrs. Client, we’ve run the numbers. After reviewing your risk tolerance and giving consideration of likely return outcomes, here is your financial plan. If you stick to this (rigid) asset allocation, it will get you where you want to go. If you stray from it, might miss out on something and run the risk of damaging your investment portfolio.”
Left unspoken is the reality that these plans & allocations are probably built on dubious assumptions about risk tolerances and market outcomes.
Instead the focus is on staying the course at all costs.
Don't even think about making any adjustments to your portfolio, they tell you.
It's going to be a roller coaster, but you are going to need to just hold on.
The central tenet here is the view that you have the right plan, now you just need to stick to it.
This might be good advice for some clients. It definitely makes it easier on the firms who are managing the money.
Yes the world is full of uncertainty & nobody knows what will happen today, tomorrow or next week. If you come across someone trying to convince you otherwise, don't walk but run in the opposite direction. That person is not to be trusted. And to the extent that portfolio changes are driven by an emotional response to noisy headlines or confirmation of fears (including the fear of missing out), disciplined inaction can be a better course.
The reverse, however, is also true: disciplined action can lead to better results than fear-based inaction.
Take for example the often-shared tables showing what happens to your portfolio returns if your miss some number of the best days in the market. This prompts fear-based inaction as investors consider the perceived costs of missing big up-days for stocks. This overlooks the reality that best days and worst days in the market tend to happen in close proximity to each other. If you are not fully participating in the best days, you are likely also not fully enduring the worst days. Over almost any time period, taking out the same number of best & worst market days from the calculations leave investors better off in terms of both risk and return.
Investors can come out ahead if we pro-actively reduce risk in challenging periods and increase it when conditions become more favorable. There are times when it makes sense to let the roller coaster leave the station without us.
Our goal here is making money. In his book on the subject ("Being Right or Making Money"), Ned Davis laid out four keys in this regard.
Rely on objectively determined indicators rather than gut emotions.
Maintain a strict adherence to discipline, which can mean checking one's ego at the door.
Be flexible enough to change your mind when the evidence supports.
Risk aversion fuels long-term gains.
I see this as call to put static, fear-based approaches aside in favor of dynamic and adaptive plans.
This suggests a more intensive and attentive approach to investing. It's a way of being that is in tune with the environment, but not overwhelmed by it. It means not needing to be proven right and forces us to admit when we are wrong. It recognizes that both action and inaction have their time and place. It allows plans to evolve as market conditions and our own risk tolerances change over time. It puts the weight of the evidence at the forefront of the decision making process.
It’s the course I’m pursuing.