It is an increasingly recognised truism that trying to time markets and flip investments rapidly isn't smart for the long run, but how active should portfolio-holders be?
It is sometimes said that constantly monitoring a portfolio and changing allocations is a fool’s game because the frictional costs of trading into and out of investments will hit returns. Timing markets is also frequently described as a folly. But a do-nothing stance might be just as foolish. Inevitably, what sort of “middle ground” is wise and how can one know where it is? Alex Shaw, director of Progeny Wealth.
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We know that curiosity killed the cat, and there were grave repercussions for Adam and Eve from feasting on forbidden fruit in the Garden of Eden. Despite Oscar Wilde opining that he could resist everything except temptation we’re taught from an early age that giving in to temptation leads to unintended consequences.
One temptation is of particular concern: the temptation to check your investments every day. Nowadays it’s easy to do this since investors can access portfolios online or via investment apps whenever and on whatever device they want. This is good for transparency but is not the best way to maximise our investments over the long term.
For most investors, not only can checking their investments every day be terrible for their blood pressure, it can increase the desire to tinker with the portfolio, and tinkering often has a detrimental effect on returns. Warren Buffett’s advice to investors is “don’t watch the market closely”. His view is that when investors are “trying to buy and sell stocks, and worry when they go down a little bit – and think they should maybe sell them when they go up - they’re not going to have very good results”. These are wise words.
Information is everywhere. It comes at us from every direction every minute of every day, whether we seek it or not. It is fine to be the type of investor who enjoys keeping an eye on the markets but the availability of too much information can be damaging and debilitating if we feel like we should be acting on each and every new development. There’s nothing wrong with this monitored approach, as long as with every new piece of information you don’t feel the need to work out the implications for your own investments.
Weathering the ups and downs
The advent of instruments that enable short-selling or betting against markets have impacted general understanding of what investing entails. We have the slightly perverse situation where investors can make as much money when markets are falling as they can when they are rising. The availability of huge amounts of information plus the vast range of instruments available to private investors can foster an impatience and short-termism that can easily lead to disappointing results.
Take short-selling: sell stocks you don’t own now and buy when the price has fallen (then return the stocks to whoever you borrowed them off). The profit is the difference between the price the stock is sold at and the price at which it is bought back…if there is a profit. The growing popularity of this style of investing brings a new dynamic and mind-set for private investors. It encourages frequent checking of investments and entering and exiting the market quickly; a smash and grab raid carried out over a very short time-frame.
Not for nothing are all investors reminded before every transaction that investments can go down as well as up. A look at the FTSE All-Share index over the last five years (1st October 2012 to 29th Sept 2017) helps illustrate the point. It has finished ‘up’ on 52.97 per cent of the trading days and ‘down’ 47.03% of the time1, so it can be pot luck on the day whether you get good or bad news.
A client once said to me “I know things can go down as well as up, but I hoped they would have gone up first”. It can be a natural response to get upset when we see a few downward days. With a diversified portfolio, the value of investments will fluctuate frequently - on a weekly, daily and hourly basis – and always has done. Reading too much into the daily market ups and downs can result in an emotional rollercoaster for the anxious investor, one that often has little to do with the long-term health of their investments.
Look to the future
So, what is a healthy amount when it comes to checking a portfolio? Checking your portfolio every day, every week, or even every month is too frequent. Over long investment cycles (ten or twenty years), knee-jerk reactions to daily developments will be a significant drag on returns. Investment is a long-term process and portfolios are structured to take account of short-term fluctuations.
The most effective and reliable way to see growth is by being patient, sticking with your plan and staying invested. As the old adage goes, it’s “time in the market rather than timing the market” that brings returns.
As an advisor, I’d love to put an investment strategy in place where I agree with a client that they don’t check it at all – they have no access to it for, say, five years, before I give them the grand reveal as to how much return they’ve made. Obviously, this isn’t practical but it might work rather well for most investors.
1, Price history of FTSE All-Share index for period 1st October 2012 to 29th Sept 2017