Do More By Doing Nothing

26 July 2019

“Doing nothing often leads to the very best of something.” – Pooh

Try not to time the market; know that prices are fair and efficient; understand risk and return; diversify comprehensively and globally. These are all sound investing lessons that we hear over and over again. Yet while we may be very familiar with these concepts, their success or failure rests on you – the investor.

Markets are relatively calm at present, but they are still sources of investor worries and angst. “The economic cycle is coming to an end”, “The stock rally has gone on for far too long” and “The BREXIT situation will roil global markets” are some common themes floating around these days. The emotions they surface may be tempting investors to sell their risky assets prematurely to hold “safe” assets like bonds, gold and cash.

Why do so many people prefer to buy a narrow selection of investments that they think could do well at specific periods of time? The problem lies with what they have learnt about investing in general. A big segment of the financial services industry has a vested interest in convincing you that the key to a successful investment experience lies with you doing more, being active, and always being on the lookout for the next big trade.

If you read the business section or thumb through any financial newspaper, you will find no shortage of advertisements for great investments, courses or strategies to help you make your money quickly. Even our local exchange is in on the act, offering a wide range of trading courses for beginner, intermediate and professional investors. This does nothing but help perpetuate the misconception that you need special skills, intelligence and activity in order to do well in investing.

However, well-established studies have already proven the very opposite: that being active in markets and trading a lot is detrimental to your financial health. In reality, investing is one area of life where constant diligence, hard work and minute day-to-day research does not actually pay any dividends and may actually sabotage your chances at success. This can be hard for many people to accept, because it goes against our experiences in other areas of life.

On the face of it, you might also think that those who engage in active trading and constant switching of investments must be experienced and sophisticated investors. Actually, medical research now points to a case of addiction for people who tend to trade a lot.

Successful investors are people who don’t trade much. Ordinary investors do not have the assets, experience and investing acumen of people like Warren Buffett, and cannot afford to use the same methods to reach investment success. Even Warren Buffett admitted that his two portfolio managers of Berkshire Hathaway underperformed the index in recent times. He has often been quoted advising ordinary investors to instead hold a diversified index fund. With an index fund, its success is not tied to a single entity, it costs less than managing individual stocks and it will be automatically rebalanced as new companies are added and old ones removed. This reduces the underlying fees in your investments and enhances the long-term compounded returns.

Unfortunately, many wealthier people still succumb to high-fee products and esoteric investments such as hedge funds and art, believing that the high price they pay will generate a higher return. In Anthony Gallea’s book Contrarian Investing, he noted that investing was one business where the more expensive the products are, the more customers want to buy them.

However, in Chapter 2 of our book Simply Invest, we showed how high fee investments severely underperform simple investments. If this is the case, why do people still want to buy them? The reason is partly down to the psychology behind why people irrationally prefer to buy luxury goods over non-luxury goods of similar or better quality. In many instances, it is about boosting their self-esteem and bragging rights.

In the end, successful investors are not necessarily the busiest or the most updated investors. They are the smart ones with a lot of free time. They realise that doing nothing doesn’t mean shutting your eyes and burying your head in the sand. It is being aware that markets move up and down all the time and it is near impossible to guess which way it will go. Knowing that markets go up 70% of the time in the long run and provides a return for the risk you take is all you need to know to be invested. Trying to do more to get a higher return could end up with you getting much less.


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GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

Here, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

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