Guest post from Robin Powell of The Evidence-Based Investor blog...
Human beings are hard-wired to do things.
And the pace of modern life has intensified it.
Our culture encourages us to maximise our time.
Keep to-do lists.
And cram our diaries with appointments.
But is this obsession with getting stuff done, really worth the effort?
In most aspects of life, this emphasis on action serves us well.
But in others, such as investing, it doesn’t.
Ofer H. Azar is an expert on how people make important investment management decisions.
He is an economist at the Ben-Gurion University of Negev in Israel.
In 2007, he conducted an experiment involving professional soccer players — specifically goalkeepers.
He wanted to find out how they decide to save a penalty kick.
Because 4 out of 5 penalties result in a goal, it’s a tough challenge.
So, he wondered, was there anything a goalkeeper could do to increase their success rate?
After analysing more than 300 kicks...
He concluded that by standing in the middle of the goal and doing nothing, the success rate increased to 1 in 3 — far higher than the average.
But goalkeepers very rarely do that.
They typically try to guess which way the ball is going to go.
Diving left or right, to try to be in the right spot when the ball arrives.
However, diving left resulted in a mere 14% success rate and diving right only 12.6%.
When faced with big decisions, high-net-worth investors tend to do the same.
They prefer to react instead of doing nothing.
Choosing to buy something.
Sell something.
Time the market.
Or tinker with the balance of their portfolio.
When, in most cases, they’re better off leaving their portfolios exactly as they are.
Why?
Let’s go back to the penalty-kick experiment for a moment.
Failing to make a save is emotional.
By taking action, even if it didn’t actually achieve anything, they were at least seen to be doing something to try to prevent a goal.
What stopped them from standing and waiting was the fear of people thinking they weren’t trying.
(Even though it offered the greatest likelihood of success).
It’s exactly the same with professional investors.
Because fund managers and investment advisers charge for their expertise...
They feel they need to do something to justify those fees.
However, there's plenty of evidence showing funds that trade the most, tend to produce lower than average returns.
And funds that keep transaction costs to a minimum are far more likely to outperform.
Ordinary investors are prone to this action bias.
They are constantly tempted to act on what they see in the media.
Ideally, they should be holding onto their chosen investments for decades.
The impact of missing just a few of the market’s best days can be profound, as shown by this animated look at a hypothetical investment in the stocks that make up the S&P 500 Index.
Credit Suisse estimated in 2015 that the average US stock is held for just 17 weeks.
Trading with that kind of regularity is going to result in very high transaction costs.
Over time, these will have a highly detrimental impact on returns.
So, what’s the answer?
As a senior international professional, your circumstances are more complex.
So finding a qualified financial planner is essential.
Especially one with an evidence-based investing philosophy.
They'll be able to devise an investment plan to suit your needs and help you stick to it.
Once you’re done...
Remember the words of Jack Bogle:
“Don’t just do something. Stand there!”
