Pogo's Successful Investing Rules for the Long Haul .... Don't Do Something ---Just Sit There

Doing nothing beats doing something when engaging in profitable long term personal investing.


Pogo says that we are the enemy, and his advice is especially germane to saving and investing for the long haul.


Stop sabotaging your investments is subtitled 'Be prepared to live with some bad returns --- for a time:'


"Most investors make a bad decision the minute they pick a mutual fund.


The key to successful fund investing, therefore, becomes not turning that one bad decision into a multitude of mistakes.


The problem here isn’t funds, however, so much as human nature, but since a prominent study shows that basic investor behaviors aren’t changing, it’s time that fund investors figured out how to make the best of their bad thoughts.


Boston-based DALBAR Inc. just released . . . a landmark study which has shown . . . that investors lag the mutual funds they buy, with seemingly every move working against them.


The tale is hardly new. Investors buy a fund after a period of good performance, waiting for the fund to prove something before adding it to their portfolio. But when the market turns and the fund’s asset category cools — or when today’s hot manager regresses toward the average after a period of oversized results — investors bail out, and look for another fund to buy, typically choosing again something that’s been hot lately.

          

In short, they buy high and sell low, and repeat the process multiple times.


In general, fund investors sacrifice the good — decent funds with reasonable returns — to pursue the great, and wind up with neither.


DALBAR’s study quantifies the phenomenon. The Standard & Poor’s 500 returned 9.22% over the 20 years ending in 2013, but the average equity fund investor only earned 5.02%.


Why? Well, . . . investors truly are at their worst when the market does poorly, selling once they have a big paper loss and sitting on the sidelines until the markets have recovered their value, thus participating in the market mostly when it is in retreat and sitting out the times when securities are on the rise....                                       


Make no mistake, virtually everyone falls prey to a classic investment blunder right from the moment they make a purchase decision.                                        


Investors just don’t buy funds that haven’t shown an ability to deliver. If performance is not unique enough to warrant an investor taking a chance, they won’t roll the dice on the fund. It’s why well over 90% of all money going into funds winds up in issues carrying four- or five-star ratings from Morningstar.


That’s not to say that investors should look for funds with lousy track records and assume they will get a turnaround, because ugly ducklings seldom become swans outside of fairy tales.


It’s more that investors should assume that whenever they decide to buy a fund, they will have lousy timing on it, at least for the short term, and they should be prepared to live with that.


“No matter how much people have been educated that past performance is no guarantee of future results, they want to buy what’s been hot and they expect it to stay that way,” said Lou Harvey, DALBAR’s president.


“But even if you say it’s human nature to buy funds at the wrong time, you can still go off and buy good funds — ones where there is a higher probability of the future delivering good results like the past — and then getting the performance of those funds from the moment you buy them forward,” Harvey said.


Getting performance that is as close to the fund’s returns as possible means holding the fund, and making either no additional purchases or deposits at regular intervals, where time — and not recent results — decides when the money is in, Likewise, withdrawals should be based on needs, rather than market calls, he said.


In the end, buy decisions aren’t bad so much as “sub-optimal;” the key to success therefore, comes in remembering that what matters most isn’t how you start, but how you finish."


Summing Up


Here's my take on achieving above average long term personal investing success.


Buy a good low cost S&P 500 index fund or a high quality diversified basket of individual stocks which pay dividends.


Then do the following --- Just sit there and do nothing.


Over time the combined magic of doing nothing and the compounding of long term investment returns on stocks will do the heavy lifting for you.


As Pogo says, when investing personally, all too often we prove that 'we have met the enemy and he is us.'


Thus, let's resolve not to be our own worst enemy.


Thanks. Bob.