Can You Do Nothing?
It's hard to do nothing and harder to disconnect in a connected world. If you have children, you've probably heard them say: "I'm bored; there's nothing to do!" If you want to see how hard it is to do nothing, turn off everything around you and close your eyes for ten minutes. Welcome back. How'd you do? Seinfeld was a show about nothing, and it was one of the most popular sitcoms of all time.
A challenging investment strategy is the buy and hold model, an approach that relies on making few changes to your portfolio over time. You do nothing but sit and wait for your investments to perform. It's easy to do nothing when stocks rise, but how about when they fall as they did in March 2020 or December 2018? It takes courage and conviction to hold your investments during a market rout, but those that do will enjoy gains when markets recover.
A buy-and-hold strategy is boring and not sexy. Tell people you own a diversified portfolio of index funds that you plan to hold forever, and they'll roll their eyes. If you read the tortoise and the hare, you know slow and steady wins the race. A balanced portfolio of low-cost index funds with 60% stocks and 40% produced an average annual return of 10.5% for the past years.
Several years ago, I worked with a broker who periodically bought and sold stocks to show his clients he monitored their accounts. His activity "strategy" benefited him more than his clients because he generated a commission with each trade. Activity for activity's sake is not wise. A common saying on Wall Street is, "Investing is like a bar of soap; the more you touch it, the smaller it gets."
Since 1950, the S&P 500 Index has returned 10.7% per year; staying invested allows you to get market returns. Dimensional Fund Advisors found that investors earned an average annual return of 10.5% from 1990 to 2020. A $1,000 investment grew to $20,451. However, if you missed the 25 best days during this period, returns dropped to 5% per year. A $1,000 investment grew to $4,376, or $16,075 less than those that did nothing.
Of course, there are times when you must sell or update your portfolio. Using your funds to generate income, pay tuition, or reduce debt is warranted. We recommend rebalancing your accounts as needed to maintain your asset allocation and risk level.
A financial plan can help you improve your investment results and give you the necessary tools to stay invested during all market conditions. It's a financial roadmap on how best to invest your assets by aligning your goals and risk tolerance to your portfolio. Your plan is an antidote against making poor investment decisions.
Give it a try – do nothing!
I think I can sum up the show for you in one word. Nothing. ~ George Costanza
November 19, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.