Why the best investment move is usually … nothing to do

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    There’s a now famous study that researchers found that in soccer goalkeepers almost always jump left or right when facing a penalty, although they would stop more shots if they just stood still. The study’s authors suggested an explanation for this behavior: Since the norm is to jump one way or another, goalkeepers would feel worse about scoring a goal by staying in the center of the net. The fans should feel the same way: “What is he doing there?”

    These are examples of action bias: the tendency to resist doing nothing even when an action is counterproductive. This tendency is behind much of the criticism from buy-and-hold investors, particularly indexers. It’s not hard to see why. In almost everything we do – doing a great job, learning a new language, getting in shape – it is obvious that the more time we spend on the activity, the better we will do. It is contrary to human intuition to accept that the opposite is usually the case with investing. In most cases, assuming you start with a sound strategy, the more changes you make to your portfolio, the worse your performance will be.

    Our action bias is particularly acute during times of economic turmoil: investors who stay on track are mocked while Rome burns, but over time they usually outperform more active traders. As the psychologist and Nobel Prize winner Daniel Kahneman writes in Thinking, Fast and Slow: “It is clear that for the vast majority of private investors it would have been better to shower and do nothing than implement the ideas that came to mind . ”

    I would argue that investors who resist the urge to tinker with their portfolios are hardly guilty of inaction. Building a diversified portfolio with long-term goals – and realigning that portfolio even when it’s emotionally difficult – is the opposite of doing nothing. It implements a thoughtful and robust investment plan with discipline.

    Restart your portfolio book cover

    Investing shouldn’t be exciting. If you’re in the mood for excitement, choose a different activity – maybe practicing yoga, writing haiku, or playing the ukulele.

    Dan Bortolotti, CFP, CIM, is Portfolio Manager at PWL Capital in Toronto. He works with clients to combine investment management with long-term financial planning. He also promotes investor education through his blog, article, and podcast.

    This article was read from Restart Your Portfolio: 9 Steps To Investing Successfully


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