Invest and Relax

It's Now Official: Invest and Relax

Invest and Relax

As we say in Step 12 of IFA’s 12-Step Recovery Program for Active Investors, “Invest and Relax.” We just received confirmation of our advice from Assistant Professor Michaela Pagel of Columbia Business School who posted this working paper which is nicely summarized in this ThinkAdvisor article for which Pagel provided some choice quotes such as this one:

“History has shown us that the stock market is a relatively safe bet over the long term because it has typically grown. Investors would be wise to keep this in mind, because those that check their portfolio too often and are driven by the daily or hourly fluctuations in the market may make decisions that have a negative impact on their long-term financial prospects.”

From our own experiences with clients and prospects, we have generally seen that investors who watch their portfolios on a daily basis are more likely to make decisions which they will later come to regret. One underlying behavioral principle cited by Pagel as a justification for avoiding news and refraining from looking up the latest portfolio value is that humans feel the pain of losses far more intensely than the pleasure of gains. The most ideal time to rebalance a portfolio is after the market has gone down, yet it is also the most difficult time from a behavioral perspective. Pagel asserts that an investor should have “a first-order willingness to pay a portfolio manager who rebalances actively on his behalf.” Other than perhaps replacing "actively" with "passively", we could not have said it better ourselves.

Pagel’s message for investment advisors is to help their clients find the appropriate allocation to risky assets and then “encourage them to be inattentive so that they don’t make the wrong decisions.” Just how inattentive should they be? According to Pagel, a model investor only looks at his or her portfolio approximately once a year. That sounds fine to us. To show how the market's upside has completely dominated its downside over the last 87 years, we created the chart below that separates out the twelve bear and thirteen bull markets experienced by IFA Index Portfolio 100. For each bull and bear market, we reset the starting value to one dollar. Over the entire 87-year period, one dollar grew to $9,433. Please note that the scale is logarithmic, so a 50% drop is shown as the same magnitude as a 100% increase (growth of $1 to $2). As you can see the bear markets have mostly been much shorter and lower magnitude than the bull markets.

If you would like to learn more about how IFA can help you invest and relax, please call us at 888-643-3133.