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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Inactivity helps

Posted by Muthu on December 30, 2014

Fidelity is one of the largest mutual fund houses in the world.

They did a study to find out what kind of clients or accounts have performed best.

You would be surprised to know that the best performing accounts are those who have forgotten that they had an account with Fidelity.

It comes as no surprise to us. In mutual funds, buy and hold strategy wins hands down.

Even an average performing equity fund, if undisturbed for long period of time, is capable of producing returns which are superior to fixed income and inflation.

The key is to buy right and forget. Even in India, as long as one has bought an ordinary equity fund (non sectoral, non thematic) and has forgotten about the same, he would have performed well over a longer periods of 10 years or more.

Forgetting protects us against ourselves. If we forget, we allow the money to compound over a period of time undisturbed. Non-tinkering of portfolio without constant churn ensures that benefits of compounding and time are able to show their effect on our investments.

Dalbar studies have repeatedly pointed out that the investor returns are lesser than investment returns (i.e.) investor earns lesser than what their investment produce because they buy and sell at wrong time due to periodical churn of the portfolio.

Many studies also points out that chasing the recent top performer or hot funds have adverse effect on the portfolio. This strategy significantly underperforms mere buy and hold of an average fund.

The following quotes of Buffett holds extremely good for mutual fund investments:

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

“Inactivity strikes us as intelligent behaviour.”

As you would have observed, we suggest changes to your portfolio only infrequently; only if we are really convinced that a change is warranted. To borrow from Buffett, we don’t get paid for activity but for being right. We get paid for creating wealth for you and not for trying to impress you with unnecessary activities. Judge us by the results of your portfolio and not on how much activity we do on the same.

I’m not asking you to forget about investments. The next best thing you can do is to be inactive.

Inactivity can be due to following; ignorance or understanding. We want to be inactive due to the understanding that many a times doing nothing is the best thing which can happen to your portfolio.

Keeping oneself active is good for health but bad for wealth.

Be active with your health and passive with your wealth.

Inactivity really helps in building your wealth.

2 Responses to “Inactivity helps”

  1. rajivahuja said

    Gem of an article.

  2. Ali said

    In 10 years or above individuals signature varies a lot. He will have to run from pillar to post to prove its his signature. Though its easy to get into MF using online portals, getting out might not be that easy because huge sum of money is involved. Please make sure your documentation with MF company is intact, and review it yearly for change of address/nominee/signature/bank details etc. Otherwise you are doomed!

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