Successful investing requires taking actions that can have a positive impact on the outcome.
Successful investing requires taking actions that can have a positive impact on the outcome.
Actuarial firm Melville Jessup Weaver's (MJW) latest investment survey found that June was a volatile quarter for investors, primarily stimulated by trade tensions between the US and China, tough talks by the US President and the resignation of British Prime Minister.
Closer to home, Reserve Bank of New Zealand andthe Reserve Bank of Australia both cut interest rates by 0.25 per cent over the quarter as they look to stimulate softening economies.
The interesting part that caught our attention was MJW's survey report also mentioned that "investors have been pondering how to prepare for the 'next crash' almost since the lowest point of the global financial crisis".
Reading the above statement, we couldn't help but wonder is an obsession with outcomes the most damaging investor behaviour?
We believe deeply that the path to success is paved with continual hard work, intense activity, and a day-to-day focus on outcomes. However, for many investors who adopt this approach, that can be turned upside-down.
The Chinese philosophy of Taoism has a phrase for this: "wei wu-wei". In English, this translates as "do without doing".
It means that in some areas of life, such as investing, higher activity does not necessarily translate into better results.
In Taoism, students are taught to let go of things they cannot control. To use an analogy, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you let the tree grow. This doesn't mean that we should always do nothing.
Insights from financial science suggest you should direct your investment efforts to the things you can control.
These include taking account of your preferences and sensitivities when choosing investment strategies, diversifying your allocation to moderate the ups and downs, being mindful of the impact of fees, and exercising discipline when emotions threaten to blow you off course.
Successful investing requires taking actions that can have a positive impact on the outcome.
For instance, to maintain their desired asset allocation, investors should regularly rebalance their portfolio back to the portfolio's targeted asset allocation. This is very often done when quarterly or six monthly distributions are received.
But rebalancing is a disciplined, premeditated activity based on each person's circumstances. It contrasts with the "busyness" of reflexively following investment trends and chasing past returns promoted through financial media.
Look at an investor who fitfully watches business TV or who sits up at night researching stock tips.
That sort of activity is likely counter-productive and can add cost without any associated benefit. With investing, always tinkering with an allocation does not perfectly correlate with success.
Now, while that makes sense, many people struggle to apply those principles because the media tends to look at investing through a different lens, focusing on today's news, which is already priced in, or on speculating about tomorrow. Guesswork can surely be interesting. But is it relevant to your long-term plan? Probably not.
People caught up in the day-to-day activity may constantly switch money managers based on past performance, or attempt tactical changes in their allocation, or respond in a knee-jerk way to news events that turn out to be noise.
Again, the assumption underlying these approaches is that if you put more effort into the external factors and adjust your position constantly, you will get better results. Unfortunately, people may end up earning poorer long-term returns from trading too much, chasing past performers, or attempting to time the market. Ultimately, that's just another reminder of the potential benefits available to disciplined investors who stay focused on what they can control.
As the ancient Chinese proverb says: "By letting it go, it all gets done. The world is won by those who let it go. But when you try and try, the world is beyond the winning."
Glen Trillo is an Authorised Financial Adviser and head of Wealth Management at Stewart Group – a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
