According to Variety, Seinfeld went off the air 15 years ago today. However I am still mining it for investment insights. One of the classic episodes is “The Opposite” in which George Costanza in turns his life around by doing the opposite of his original instinct. Or as Jerry says, “if every instinct you have is wrong, then the opposite would have to be right.” For many investors the instinct to trade is the wrong one and they should in fact do “the opposite.”
As I discuss in my book the financial media is built on trying to titillate and tease you which often leads to a desire to trade. Unfortunately for most investors deviations from their investment plan turn about to be a losing proposition. Carl Richards writing at the Bucks Blog notes how for those investors with a well-diversified portfolio trading is little more than “entertainment.” Costly entertainment that is. Richards writes:
Everyone else is moving, trading, talking. Why not us? It’s what investing is all about, right? Wrong.
That is called entertainment. If you want a term to justify it, you can call it trading. But the evidence is clear that it doesn’t work. So this is one of those rare opportunities to improve your results by being lazy. Build a portfolio that matches your goals, and forget about it.
Richards notes that we have this bias for action. In the case of university endowments a really simple 50/50 portfolio matched their performance with less risk and substantially less effort. We feel that as the markets move we need to move with them, that we are missing out on opportunities. His recommendation is that investors take a break and “do nothing for while” and see how that goes.
I have written before that most investors would do themselves a favor by “doing less.” Less trading, less time worrying about your investments and more time focusing on those activities in your life where you really can add alpha. In short doing the opposite. For the vast majority of investors, investing isn’t their passion or their forte. Investing in a well-diversified, low cost portfolio that is rebalanced occasionally and optimized for taxes is the best most investors can do.