From the Wall Street Journal (subscription required) to the cartoon people interviewed on TV with zippy music, a recent theme in the financial press is that it’s “madness” to build a portfolio using the traditional method of setting an asset allocation and sticking with that strategy through market choppiness. No, these experts say, the market crisis proves you need to day-trade your way to investment success.
I guess I’d ask these folks who they think will be on the other side of their trades? It won’t be the buy-and-hold investors, since they are, for the most part, buying and holding. In all likelihood, it will be someone else who’s “actively managing their portfolio for success.”
As I see it, the problem is that with each trade, both sides of the deal are out a commission, and only one side is going to get the better of the exchange. Barring a significant informational advantage, the odds of winning that game are 50/50, before costs. When investors leave the world of “buy and hold” and enter the world of “buy and sell,” they exchange the prospect of being compensated to bear risks for the prospect of, well, just taking risks.
Many find it hard to accept that there really isn’t much that needs to be done on a day-to-day basis to create a successful investment portfolio. The passivity of buy-and-hold seems like surrender. But it’s important to remember that “buy and hold,” as Vanguard talks about it, isn’t just sitting tight no matter what.
While some finance theory does point in that direction, in my view, rebalancing to a strategic asset allocation is a very important part of implementing a sensible strategy. But that doesn’t mean trading the portfolio every day. To me, it means looking at the portfolio periodically, perhaps once or twice a year, to determine whether the market has moved the portfolio from its target allocation. If so—and if the move is more than 5% or so—that means it’s time to rebalance. So, for many investors looking at their portfolios in the first quarter of this year, it was time to rebalance.
And wouldn’t you know it, given the market performance in March and April, rebalancing worked out very well. Of course, that’s not always the case, and catching a market upswing is never guaranteed. Sometimes rebalancing hurts you: If you had done it in December, the outcome would be a little different. But the point of rebalancing is not to catch the ups and downs; it’s to control risk and keep your portfolio aligned with the strategic target that you set to provide the right mix of risk and potential return.
The market ebbs and flows, and thrashing about in the midst of it is very much a waste of time and effort. In the end, the economy—and the productive capital in it—must be bought and held by someone. Constant ownership change doesn’t alter the productive capacity of the asset.
Despite all the noise and advertising, I think most investors do get it. And if the economy does recover, and the markets bounce back from this bear in a strong way, there’s a chance that instead of a new generation of “Depression babies” frightened out of the market forever, we’ll get a generation of investors who know it’s truly madness to pay attention to the hype and hyperbole, and better to stick with a balanced, diversified, strategic approach.
Maybe they won’t rename the Wall Street Journal the “Main Street Journal,” but one can always hope.
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