Why it can pay to leave your investments alone

Greg Davies

Does football have anything to do with investing? You might be surprised to discover that – in one respect, at least – it does. For an analysis of 286 penalty shootouts found that goalkeepers who simply stood still, rather than leaping to the left or the right when the penalty was taken, had the best chance of making a save.[1]

Greg believes investors would be wise to take note, because doing nothing with a portfolio can often also be the best approach:

“Goalkeepers often leap about because it looks better than if they just stand still. Investors face similar pressures to act when markets are volatile.”

The problem, says Greg, is that it is impossible to predict the correct course of action, so investors often “jump about spectacularly and fail to save the investment ball that's gone right down the middle”.

Investors would, he argues, generally be much better off “if they simply did nothing on the basis that markets tend to rise over the long term and they don’t know which direction they are going to move in the short term”.

Greg adds that every action involves a cost and, at the minimum, there is a transaction bill for buying and selling assets.

Greg adds people often make an analogy between financial markets and casinos, and in a way they are right. He explains:

“Markets are highly unpredictable in the short term, so it is a bit like betting on red at roulette. You really don’t know where the ball will land. However, while the odds are always tilted towards the house in any casino over the long term, the opposite is true when it comes to investing. That’s because, over time, financial markets tend to increase in value.

But ignoring what professional investors call “market noise”, such as TV news reports of “tumbling” share prices, can be extremely difficult. Moreover, in any downturn, the media is full of grey-suited individuals announcing with great confidence that markets have much further to fall.

As Greg points out, investors “seek emotional comfort from authoritative figures who sound as though they know what they are talking about, when in truth they are just guessing like the rest of us”.

Indeed, Greg believes that one way of identifying a good financial advisor is how often that person says “I don't know” when you ask them what the future will hold. He adds that “it is not a good sign if your financial adviser says they do know what the future holds”.

So, when it comes to investing, doing nothing doesn’t mean you are being lazy. In fact, while it can be emotionally challenging, and therefore tiring, a lack of action may well be in your own best financial interests.

[1] Source -  https://doi.org/10.1016/j.joep.2006.12.001

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