Nervous energy is a great destroyer of wealth.—-Fayez Sarofim
This quote was embedded in an article written by Jim Goff, the research director at Janus. Along with making the case for equities, he talks about how important it is to have a reasonable allocation that you can stick with—and then to leave it alone.
Mr. Goff talks about the way in which many investors undermine their returns:
The average investor is far from contrarian. I remember vividly when a strategist from a top-tier investment firm in the mid-1990’s told me that while the S&P 500 had grown at 13% per year over the prior 10 years, the realized equity returns of his firm’s retail client base, on average, had compounded at only 5% per year. The S&P would have turned $100,000 into $339,000 during that period, but their average investor ended with $163,000.
Often this is caused by jumping in and out of an asset class, rather than by making tactical adjustments within the asset class. There’s nothing wrong with tactical asset allocation as long as it’s done systematically. Even a lousy version of strategic asset allocation—carried out effectively—will probably beat what most investors are doing! Either way, undisciplined fiddling often ruins investment results. Mr. Sarofim’s quote is something to take to heart.
There are a couple of points relevant to portfolio management.
- Think about a reasonable asset allocation for your situation, one you can stick with.
- Have a systematic process for making portfolio adjustments, not one that is undisciplined and responsive to the news environment.