The following article is written by Jim Parker, VP, of Dimensional Fund Advisors. Dimensional is the primary investment manager that Premier utilizes to build our client portfolios. Jim’s article is a good summary of why investors may be well advised to “let go” and resist the temptation to continually modify their portfolio based on market trends. We hope you enjoy.
The Art of Letting Go
by Jim Parker, VP, Dimensional Fund Advisors
In many areas of life, intense activity and constant monitoring of results represent the path to success. In investment, that approach gets turned on its head.
The Chinese philosophy of Taoism has a word for it: “wuwei.” It literally means “non-doing.” In other words, the busier we are with our long-term investments and the more we tinker, the less likely we are to get good results.
That doesn’t mean, by the way, that we should do nothing whatsoever. But it does mean that the culture of “busyness” and chasing returns promoted by much of the financial services industry and media can work against our interests.
Investment is one area where constant activity and a sense of control are not well correlated. Look at the person who is forever monitoring his portfolio, who fitfully watches business TV, or who sits up at night looking for stock tips on social media.
In Taoism, by contrast, the student is taught to let go of factors over which he has no control and instead go with the flow. When you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you leave the tree to grow.
But it’s not just Chinese philosophy that cautions us against busyness. Financial science and experience show that our investment efforts are best directed toward areas where we can make a difference and away from things we can’t control.
So we can’t control movements in the market. We can’t control news. We have no say over the headlines that threaten to distract us.
These principles are so hard for people to absorb because the perception of investment promoted through financial media is geared around the short-term, the recent past, the ephemeral, the narrowly focused and the quick fix.
We are told that if we put in more effort on the external factors, that if we pay closer attention to the day-to-day noise, we will get better results.
What’s more, we are programmed to focus on idiosyncratic risks—like glamour stocks—instead of systematic risks, such as the degree to which our portfolios are tilted toward the broad dimensions of risk and return.
Ultimately, we are pushed toward fads that the financial marketing industry decides are sellable, which require us to constantly tinker with our portfolios.
This is borne out each year in the analysis of investor behavior by research group Dalbar. In 20 years, up to 2012, for instance, Dalbar found the average US mutual fund investor underperformed the S&P 500 by nearly 4 percentage points a year. This documented difference between simple index returns and what investors receive is often due to individual behavior—in being insufficiently diversified, in chasing returns, in making bad timing decisions, and in trying to “beat” the market.
Recently, one of Australia’s most frequently quoted brokers broke ranks from the industry and gave the game away on this “busy” investing. In his final note to clients before retiring to consultancy work, Morgan Stanley strategist Gerard Minack said he had found over the years that investors were often their worst enemies. “The biggest problem appears to be that—despite all the disclaimers—retail flows assume that past performance is a good guide to future outcomes,” Minack said.
“Consequently, money tends to flow to investments that have done well, rather than investments that will do well. The net result is that the actual returns to investors fall well short not just of benchmark returns, but the returns generated by professional investors. And that keeps people like me employed.”
It’s a frank admission and one that reinforces the ancient Chinese wisdom: “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.”