The question, “Should I change my investing strategy?” is potentially the most damaging of all investing questions.
It usually starts out like this…
You’re doing everything you know you should do (or… everything your advisor suggests you should do). You’re appropriately allocating across asset classes, diversifying within them, saving more, and rebalancing regularly.
But, you always seem to know someone who’s enjoying higher returns. FOMO kicks in and you think it’s time to change your strategy.
But here’s the catch.
The people experiencing “better performance” change over time. You don’t know that, though, because it just looks like more people are always doing better. People only talk smack when they are doing well. They never tell you how they’re performing poorly over the next part of the cycle.
You only see those whose performance makes you jealous. Comparing yourself to them will always leave you feeling worse. The worse you feel, the more insistent that question becomes until the noise is irresistible.
So, Should you change your investing strategy? Probably not, and here’s why.
The Problem With Changing Your Investment Strategy
When you sell something you own that isn’t working just to buy something that has been working better for someone else, you’re making a bet that these things all move in a straight line. You’re betting that reversion to the mean is a thing of the past. You’re saying that the human proclivity to pile into things when they’re exciting and run from them when they’re scary is a distant memory.
You are choosing to sell low and buy high.
Not only does this go against what all great investors teach us, but it also has emotional consequences. When you choose this investment approach you:
- Always worry about the stock market – (when you’re at work, out with friends, on vacation, and so on)
- Lose sleep at night stressing over your performance – (which affects your relationships, health, and job performance)
- End up feeling guilty and incapable as you experience lower-than-average returns – (because each change creates trading costs and tax consequences without adding to returns. Remember reversion to the mean?)
As an advisor, I am constantly saying, “Don’t do that” as people react to some current data point. Sometimes the most important thing I can suggest you do – for both better financial and personal outcomes – is nothing. The good ones force boring.
Why A Boring Investment Strategy Wins
The media, society, and even your friends are quick to tell you your boring investment strategy won’t win – but don’t listen.
The boring approach is the most efficient way to achieve long-term success in your investment portfolio because it reduces the risk that you’ll make a mistake when your normal emotional responses move you to do something when you shouldn’t.
These four steps make up a boring (but higher probability) investment strategy:
Step 1: Asset Allocation
You choose an asset allocation mix based on your time horizon and risk tolerance. If you’re in your 20s and just getting started, you may have an asset allocation heavily weighted in shares of the great companies around the world (global equities). If you’re nearing retirement, equity may be less of a priority – but you will still need some equity returns to keep your income ahead of inflation.
Regardless of your mix, a solid investment approach divides your assets among these three asset classes:
- Equity assets – (this has the highest volatility of the three and the highest long-term returns)
- Fixed-income assets – (the goldilocks of the three, this class provides stability but has lower long-term returns than equity)
- Cash or cash equivalents – (this pays little, but is also the least risky of the three)
Step 2: Diversification
Once you’ve established your asset allocation mix, you diversify within each of the three classes mentioned above. Instead of owning a ton of shares in a few companies, you own a few shares in a ton of companies. You could own individual stocks if you have a lot of money invested, but you can also own low-cost funds or ETFs to achieve broad diversification.
Step 3: Automatic Deposits
Step 3 is the unsung hero of the boring investment approach. It takes the pressure off of investing through automating contributions. Instead of having to remember to make a transfer every month, the money goes into your account the second you get paid.
If the market is doing well, you buy fewer shares with your regular investment amount. If the market is down, you buy more shares. We call this dollar-cost averaging, and it’s an important tool that can lead to higher long-term returns if consistently applied.
Step 4: Regular Rebalancing
As time passes, your portfolio’s risk shifts due to a change in markets. Maybe the stock market has been very strong and you are now over-exposed to stocks. Rebalancing brings your portfolio back to the original asset mix you chose in Step 1. It ensures you stay at the level of risk you feel most comfortable with, and it does one more very important thing… rebalancing forces a buy low-sell high decision. When you rebalance, you sell the things that had the strongest performance (high) and buy the thing with the weakest performance (low) in your own portfolio.
All you have to do is keep dollar cost averaging and keep rebalancing annually until you have ‘enough’ as defined by your plan.
The Benefits Of A Boring Investment Strategy
When you choose the boring investment approach, you:
- Can enjoy more consistent returns and higher-probability of reaching long-term outcomes. You should remain aware that your trust will be tested whenever you hear about great short-term returns.
- May even outperform an appropriate benchmark. This hardly matters when you are on the path towards reaching your financial goals (putting kids through college, caring for aging parents, or creating a retirement income you can’t outlive).
- Are hopefully able to tune out the financial press – always touting the newest investment product or squaking about the latest economic statistic. They won’t actually stop publishing; you will simply be tuning them out.
- Have peace of mind and less stress. Isn’t this what you wanted to begin with?
If this is your current investment strategy, don’t change a thing through this years volatility. The key to better outcomes is 1st. having a plan, and 2nd. sticking with the plan.
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