Lots of studies of investor behavior show that one of the big things that undermines investor returns is emotional behavior. Most often investors are better off constructing an intelligently diversified portfolio and then sticking with the strategy through thick and thin. Inaction is never a popular tactic, especially when things are rocky. Clients usually expect advisors to respond actively to changes in the market—even when those changes are just noise, rather than a fundamental change in the underlying trend.
A humorous view of this was recently expressed by John Bogle in an article at Marketwatch:
“What advisers have to do is respond to events. Activity is something investors expect,” Bogle told USA Today in an interview. “I was talking about buy and hold to some investment advisers, and one said, ‘I tell my investors to do this, and the next year, they ask what they should do, and I say, do nothing, and the third year, I say do nothing.’ The investor says, ‘Every year, you tell me to do nothing. What do I need you for?’ And I told them, ‘You need me to keep you from doing anything.‘”
I put the fun part in bold, although perhaps the correct phrasing is that the advisor is there to keep the client from doing anything stupid. This is noteworthy, because I rarely agree with John Bogle about anything!
I don’t agree with buy-and-hold or most of his other precepts, but he is right that good investing is sometimes as much about inaction as action. Pick a robust strategy like relative strength or value (or better yet, combine a couple of complementary strategies) and then stay the course. Whatever strategy you select will go in and out of favor from time to time, but you can’t let that throw you off your game. You’re much more likely to be rewarded by sticking with it.