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

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Nothing is a good thing

Posted by Muthu on December 11, 2015

“The trick is, when there is nothing to do, do nothing.”-Warren Buffett

“We find doing nothing the most difficult task of all.”- Warren Buffett

“The key is to wait. Sometimes the hardest thing to do is to do nothing.”- David Tepper

“The single most important variable for how you’ll do as an investor is how long you can stay invested.”- Morgan Housel

“Markets reward patience more than any other skill.” –Morgan Housel

“I’ve learned that a willingness to wait longer than other people is your biggest natural edge.”- Morgan Housel

As we repeatedly point out, once an investment course is chartered out, doing nothing and staying the course is often the best thing to do.

I read this interesting article.

During last 30 years, in USA, the S&P 500 has delivered an annualised return of 11.1%. Whereas during the same period, an average investor earned only an annualised return of 3.7%.

This is because investors get inside the markets or a fund after few good quarters and exit after few bad quarters. So they try to time the market and chase hot funds. This is a recipe for disaster.

In stock markets, returns are lumpy and not linear. In a 10 year holding period, most of your gains would have come in a total of 3 or 4 years. You can never know in advance which day or month or quarter or year that would be. Buy and hold is the best way to gain from the markets.

In a portfolio of stocks like mutual funds, holding period decides your success. If your holding period is 10 years or more and as long as you don’t do anything foolish in between, wealth is all yours. The biggest mistake people make is getting panicked by downfalls and exiting at the wrong times.

The above article also mentions:

“Behavioral economist Richard Thaler, now known for his books Nudge and Misbehaving, wrote a defining paper on the “equity premium puzzle” in 1985…

His conclusion was that folks’ ability to tolerate stock-market risk was inversely proportional to how frequently they checked in on performance. And, according to Thaler, “For someone with a 20-year investment horizon, the psychic costs of evaluating the portfolio annually are 5.1% per year.” Thaler later suggested investing heavily in stocks but avoiding all stock-market news.”

I’m not against review. Look at your portfolio only once a year when we do annual review at the end of financial year. In between, forget about your investments and simply stay the course. Don’t keep tracking stock market movements. Avoid action bias. Just because there is an annual review, it doesn’t mean that there should be a portfolio change. Understand that doing nothing is most often the best thing in investing. Action on portfolio should be minimal and only be done when absolutely essential. We’ll tell you if and when you should take action. Otherwise the default option is to do nothing and stay the course.

If you follow what we say, your returns would match that of funds. In other words, investor returns would be equal to investment returns. There would not be any loss or decrease in returns due to behaviour gap and psychological costs.

In investing, nothing is a good thing.

3 Responses to “Nothing is a good thing”

  1. ajjw123 said

    Great as always,Thanks a lot

  2. Dilip said

    Very nice article. Too good. How to control and strategies based on this article ?
    We always think to sell and buy lower good scrips
    We sell even in loss and wish to cover lower .
    How to manage this ?
    When we get stuck in loss and finish liquidity and then above 2 types of action are accelerated.
    Pl guide. Thanks.

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