The Art Of Doing Nothing
By Roger Nusbaum, AdvisorShares ETF Strategist
Eric Balchunas from Bloomberg tweeted the following from his participation at the Evidence Investing Conference last week;
One area where passive and active mgrs both agree: Investors need to learn patience and the art of doing nothing.
That tweet was in conjunction with an earlier tweet;
Biggest takeaway from my factor panel was importance of sticking w it through thick in thin. That’s only way it works.
These are both great points. The overarching theme is investment discipline and not overreacting or over-trading.
When an investor hires an advisor, or sets out on their own, they very rationally choose a path that makes the most sense for them. At this point in the process they fully realize that bear markets come along every now and then, that occasionally their strategy will lag and that investing requires patience.
Knowing all these things when sitting around a table with an advisor or looking a computer screen in the den is a whole lot easier than in the middle of a bear market or after a year where the benchmark is up 10% versus a portfolio gain of 2% due to a bias to some factor that lagged this year but historically has done well or when the stock that has been raising its dividend every year since WWII goes down 15%.
Immediately after the election there was an interesting bifurcation at the sector level between perceived winners and losers. Tech came back some after initially getting crushed, financials have remained strong and so on. Anyone with a properly diversified portfolio had exposure to both winners and losers. If the initial reaction turns out to be correct (that in and of itself is a huge ‘if’) there will be plenty of time to tilt more to sectors likely to outperform which minimizes the need to react in a panic, chasing returns.
One of the fascinating things about investing it is that is an endeavor that people can make extremely complicated or extremely simple. I am a huge fan of simple for all kinds of reasons including less trading, better tax efficiency, less opportunity to react badly to market events that turn out to mean nothing like the flash crash or that thing on August 24th, 2015 when the Dow opened down 1000 points.
Simple does not mean do nothing, I don’t believe in set and forget. To me, simple means easily explained with a simple, active strategy that will require some, but hopefully not a lot, of trading. At times, though, there does need to be a lot of trading but it should be in the context of a disciplined strategy, not coming unglued over an earnings miss.
I wanted to mention one thing from the ETF Roundtable in Barron’s over the weekend. Of alternatives, Ben Johnson from Morningstar said “the best possible outcome people have gotten from alternative ETFs so far is Treasury-like performance at 10 times the price.“ Looking backwards, yes, returns do look like treasuries, maybe a little less than treasuries actually. The comment though ignores the bull market in bonds. Alternatives are for when things are not going well in stocks and bonds not when things are going well.
Since the start of October bonds have had a rough go, longer dated treasury ETFs have seen double digit declines. Now look at a wide swath of alternative strategies. Many are doing what they should in a rising rate environment (short lived or otherwise). Not all are doing well, managed futures and risk parity seem to be struggling relative to alternatives but still look good compared to longer dated treasuries. I did not find any alternative funds that are down double digits since the start of October but there very well could be. Alternative strategies may or may not be right for you but they should be considered in the correct context.