Tag Archives: portfolio

Investment Activity And The Illusion Of Control In Exchange For Low Real Returns

Study after study shows that more investment activity is correlated only with higher fees and lower real, real returns. Activity is the illusion of control in exchange for lower real, real returns. You don’t want to be irrationally long term, which usually results in huge amounts of short-term permanent loss risk. But you also don’t want to be so short term that you take no risk. The best way to reduce taxes and fees in your portfolio is to take a long-term perspective. Again, a multi-year or cyclical time frame blends perfectly with maximizing your real, real returns. I take a cyclical view on things. This means I can sometimes go years without making big changes in my views or portfolio. This is a very intentional construct, and I think it’s one that most people should adhere to. After all, you don’t want to be irrationally long term , which usually results in huge amounts of short-term permanent loss risk. But you also don’t want to be so short term that you take no risk. As we find with so many things in life, moderation is the key. Hence, my cyclical or multi-year perspective on things. Resolving this temporal problem isn’t the only reason for this, though. We know that taxes and fees are two of the most important frictions in a portfolio. And the best way to reduce taxes and fees is to take a long-term perspective. Again, a multi-year or cyclical time frame blends perfectly with maximizing your real, real returns . Of course, this is easier said than done. We live in a world dominated by “What have you done for me lately” narratives. And worse, we are confronted with our own biases that make us feel comfortable when we’re doing something. After all, letting your portfolio float in the wind feels very uncontrolled, and oftentimes, uncomfortable. Activity is the way in which we try to “control” the markets. Of course, you can’t control the decisions of other market participants. And study after study shows that more activity is correlated only with higher fees and lower real, real returns. Yet, the allure of greater control pulls us in. Activity is the illusion of control in exchange for lower real, real returns. Luckily, there is a happy medium here. There is no need to be irrationally long term or short term. But it takes a great amount of discipline to reject the illusion that activity creates control. For most, that illusion (and the sales pitch of “market-beating returns” that often goes with it) is too enticing to reject.

Myopia & Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.”. Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now it is one of many things frequently forgotten in the heat of a large decline. Additionally we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.

Myopia And Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before, going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now, it is one of many things frequently forgotten in the heat of a large decline. Additionally, we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment, this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.