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Learning to Stand Still

Your clients’ success depends on it.

Carl Richards, 07/28/2016

One of the most important things that we can do as an industry is to teach people to do absolutely nothing. Of course, this goes against everything they hear on the investment pornography networks, but that might make it even more true.

Let me explain a bit.

Once we’ve worked with clients to design a portfolio and a plan that will give them the greatest chance of meeting their unique goals, their success will depend almost completely on their ability to do nothing with their investments. Outside of the occasional tax transaction and disciplined rebalancing, doing nothing is the right thing do to.

Ugly Alpha
I could bury you with evidence of this, but Ben Johnson’s column in the April 2016 issue of Morningstar ETFInvestor serves as an excellent recent example. Johnson compared the gap between investment returns and investor returns, what I like to call the behavior gap. Ignore for a minute the very obvious conclusion you could make about the superior behavior of investors in passive funds and focus on the final number in a table Johnson shared.

When you look at all funds (equity, fixed income, alternatives) over the past 10 years, you get a negative behavior gap of 0.79%. I call this “negative behaviorial alpha,” but my mom calls it “UGLY”!

Just stop for a minute and consider what that number tells us. While investors and advisors were running around searching for alpha, because that is, of course, what we all thought we were supposed to be doing, we got a 79-basis-point whack upside the head.

I know why we do it. We think it’s our job to find the best investment, and the public thinks it’s our job because they occasionally see that circus clown on the TV yelling about buying and selling. Of course, investors think they should be doing something. There are multiple TV channels with dozens of people talking about it!

But that’s “entertainment,” and we are in the very serious and sacred role of helping people build dreams and avoid nightmares.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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