I repeat. Do nothing.
Our whole lives we have been told and our own experience shows us by working hard, getting good grades, keeping busy, and pushing forward is almost a sure bet to getting ahead and grabbing the brass ring.
In investing, the opposite is true. Which is why it makes it so hard to do. Doing nothing is almost always the surest way to success. As Warren Buffett says, "The Stock Market is designed to transfer money from the active to the patient."
The best-performing mutual fund in the first decade of the 21st century was the CGM Focus Fund. During the ten years covering two recessions, the fund managed to generate an impressive 18% annualized return. What's even more amazing than this impressive return is that the typical investor in the fund actually lost almost -11% annually.
You read that right, an 18% gain for the fund and an -11% loss to the investor.
Huh? How is this even possible?
Investors were doing exactly the opposite of what they should have been doing; they were buying high and selling low. Investors plowed into the fund when it was high, and when the fund waned a bit, they sold. This is one of the surest ways to go broke.
And the CGM Focus Fund’s shareholders are not alone. Several other studies indicate that equity fund investors underperform across the board, on average, by over 6% per year between 1991 and 2010, according to Davis Advisors.
Why does this happen?
You can blame biology, we are preprogramed to want to "do something" when we are scared. And it made sense tens of thousands of years ago when we had to decide if a large animal might attack us. Quick action made sense, run now and live to hunt another day. This evolutionary response was critical to our survival as a species for thousands of years, unfortunately, our biology hasn't kept up with our current 'survival' needs.
So where does this fear come from today? It comes from the media, so-called 'advisors', friends, family, co-workers, and neighbors. Most unsuccessful investors chase performance, engage in panic selling, and adopt myopic thinking encouraged by watching daily prices.
Successful investors realize that no one can time the market consistently and therefore they ignore all the fear around them. They know the most important thing, is to have a plan, stick to their plan, and when others are selling, they do nothing. Warren Buffett said it best, "Investing is simple, but not easy."
- Paul Rossi
Paul R. Rossi, CFA