Sometimes The Best Course of Action Is To Do Nothing

I was reading some literature from a private bank and came across a client who encouraged moving because you want more "action" on your money. After all, he argues, you're paying a money manager to do something. Sorry. Wrong. Sometimes, the best money managers are those who tell you to do absolutely nothing. If you've chosen a portfolio of excellent businesses and want to profit from the underlying growth in earnings and dividends, then you shouldn't change unless the firm has become overvalued, other firms have become undervalued, or a fundamental change has happened in the quality of the business.

Yet, people suffer from what psychologists have called "action bias". We believe that if we simply do something, we get closer to our goals. There is also evidence that when an investor moves money from one investment to another, the original holding almost always outperforms in the subsequent twelve months. Just consider the evidence provided by Dr. Jeremy Siegel regarding the S&P 500 market index. "One of the most remarkable aspects of these original 500 firms is that the investor who purchased the original portfolio of 500 stocks and never bought any of the nearly 1,000 additional firms that have been added by Standard & Poor's in the subsequent 50 years would have outperformed the dynamic updated index. The return of the original 500 firms was 11.72 percent versus 10.83 percent for the updated index. This annual difference results in a 50 percent higher accumulation in the original stocks than those updated in the index."