In his latest Behavior Gap Newsletter, Carl Richards nails that feeling of confusion that comes when we learn first hand that “past performance is not a guarantee of future results.”
Investing isn’t like hiring a basketball coach, Richards argues, but rather like planting an oak tree:“You never plant a tree and then pull it out every time the wind blows just to check the roots.”
He also quotes this gem from Warren Buffett: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”
Why We Should Do Less With our Investments
In his book Wise Investing Made Simpler Larry Swedroe makes a similar point using a study conducted by a trio of academics. Edwin J. Elton and Martin J. Gruber of New York University, and Christopher R. Blake of Fordham University, examined 43 401(k) plans from 1994 through 1999.
Over those five years, the 401(k) plans added 215 new fund options for participants and dropped 45 funds from their plans. The funds added had a strong track record. Those that were dropped had poor recent performance.
The professors soon discovered that the new funds promptly underperformed those that had been given the heave-ho.
That brought the overall quality of the offerings down. Making matters worse, participants in the plans constantly chased performance by shifting money into last quarter’s top performers, the study notes.
Give Your Money A Chance To Grow
The argument Richards, Swedroe, and others make is simple. Having put thought and effort into setting up their investments, investors need to give them a chance to grow. That doesn’t mean you can’t appreciate their beauty and even check in on their performance now and again, but successful long-term investing requires patience.
If you have ideas for setting the right balance between enlightened remove and dangerous neglect, chime in.
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