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Over-managing may destabilize investment foundation

Over-managing may destabilize investment foundation

March 27, 2014

Investors are programmed to fail. The culprit is our DNA. We are destined to have poor investment results and do so regularly.

Life in the world outside of investing often rewards those who take as much control of their environment as possible. The frequent outcome of being proactive is success.

That is not the case when managing your investment portfolio. Success requires the discipline of not over managing your portfolio. The popular expression of investing for the long term is your best guide. Have the patience to let things evolve slowly over time.

Creating a good long-term portfolio does require some initial decisions. Investing requires a good foundation as with other things you build. Focusing on controlling the fundamental elements of investing is critical.

We can determine the fee amount we are willing to pay and be aware of the transaction costs of buying and selling securities, but how much risk do we want to take? How much diversification is needed to adequately spread the investment risk between different types of investments and around different parts of the world?

Answers to these questions provide your investment foundation. After carefully laying down the foundation, you need the discipline to not attempt to be pro-active and make short-term decisions based on the news of the day.

That is the difficult part. The financial media is constantly bombarding us with up-to-the minute information. Investors are tempted to abandon their long-term investment approach by capitalizing on this news and use it as a tool for increasing their investment results.

We talked about this a few weeks ago by looking at some of the headlines from the more credible U.S. media last year. Their bold headlines were misleading diversions from what was actually happening with investments.

All the “noise” that deflects an investor away from the fundament details of investing is costly. The research group Dalbar analyzed the success of mutual fund investors.

During the 20 years up to 2012 U.S. mutual fund investors underperformed the S & P 500 stock market index by 4 percent per year. The sad outcome of that dismal performance was that all of these investors took the risk by investing in the stock market. As it turned out those same investors also took the risk of mismanaging their portfolio.

The stock market has enough risk without adding an extra layer by straying from the fundamentals of investing and by making poor decisions based on meaningless short-term information.

The Dalbar report is consistent with other similar reports that have been produced on a fairly regular basis in both the U.S. and Canada.

Our recommendation is to avoid the trap of over managing your investments. Build a solid investment portfolio and invest for the long term.