Financial planner Carl Richards advises that "what you don’t know about your portfolio may help you." He laments that watching the market has become a "spectator sport" and that obsessing over the daily or even minute-by-minute fluctuations isn't all that useful for most investors; in fact, there's a good case for arguing that this behavior probably reduces performance. "Knowing doesn’t help," he writes.
He makes a good point, although much depends on how an investor is monitoring the markets and how she's using that information to manage the portfolio. In some cases, perhaps most cases, less can deliver more. "So here's the thing to ask yourself," he recommends. "Other than upsetting yourself half of the time, what good is it doing you to look anyway? Maybe we should all invest as if we're going on a 12-month trek in Nepal!"
This amounts to the buy-and-hold strategy, which has increasingly fallen out of favor, in part because so many investors suffered with this approach when the financial and economic crisis struck in 2008. Sometimes sitting tight and looking infrequently works, but sometimes it doesn't. In the long run, it'll probably do OK, assuming that exposure to beta risk earns a profit. That's a reasonable assumption if we're projecting risk premiums for the next 10 or 20 years. But the shorter run, even three to five years, is a different animal.
As we all know, we have to get through the short term in order to reap any long-term benefits, and that's a lot tougher than it sounds. It's easy to say that we'll buy a bunch of funds and let 'em ride for next decade or two. But almost no one can do this because most of us live in the wired world of the 21st century.
Richards implies that we face a binary choice: short-term speculation with lots of trading vs. buying and holding and ignoring the markets most of the time. But there's a third way that travels a middle path, taking a bit from each extreme. Some call it tactical asset allocation. But labels don't mean much because there are as many ways to manage a portfolio as there are stars in the sky.
The first issue in deciding how to manage your portfolio is figuring out what's right for you. This can seem like an overwhelming subject, given the wide array of investment strategies. But we can and probably should start with the basics: asset allocation and rebalancing.
As I've discussed many times in this space, these two factors are the foundation for designing and managing successful strategies. Owning a reasonably diversified mix of the major asset classes and rebalancing the portfolio periodically has a history of generating competitive returns with moderate risk. That's not likely to change in the years ahead, in part because alpha is a zero sum game and so a forecast-free strategy that focuses on optimizing beta's return can do quite well.
But can we do a bit better? Here's where most folks get into trouble, as Richards suggests. The details matter, however. Frequently monitoring the markets will probably cost you money if it's linked to an ill-conceived strategy. But with a well-designed strategic focus, looking frequently at Mr. Market's gyrations can be, and probably will be, productive.
For example, let's say that you own all the major asset classes via ETFs. By one measure, this adds up to 14 funds, although you could raise or lower that number, depending on how you want to slice up the markets. The point is that a broad set of asset classes is probably going to provide a wide range or return and risk results on a regular basis. Ignoring the volatility and reviewing your portfolio, say, once a year can still do OK, but only if you're sure that you can't control your emotions, which may go on a roller coaster ride by analyzing market action frequently. But if you have the capacity to stay disciplined and recognize that volatility represents opportunity, frequent reviews of your portfolio's ebb and flow can yield valuable insight. This isn't because frequent reviews should translate into more trading. Relatively infrequent rebalancing is still preferred. Instead, the goal is to spend more time looking for the best points in time to rebalance.
Let's say that you could only rebalance your portfolio five times over the next 20 years. That's it -- no more, no less. In that case, would you be inclined to monitor the shifts in your asset allocation more or less frequently? I'd say that more is better here.
On May 1 of this year, I updated the latest numbers for the major asset classes and noted that returns were unusually robust across, well, almost everything. In some cases, assets posted gains in a few months that, under ideal conditions, you would normally expect to see only over a year or two. A month and a half later, quite a lot of those alluring returns have been pared. Shocking? Maybe, but only if you thought that unusually hefty returns were going to roll out indefinitely.
The point is that rebalancing when you've earned a year or two worth of gains in a few months is usually a smart decision. But you would have been oblivious to this opportunity if you only looked at the markets at the end of each calendar year.
Yes, this is a slippery slope for some (most?) investors. If you're an alcoholic, even one drink may be one too many. But if you can muster the discipline to look frequently in search of opportunity, the results can be impressive over buy and hold. Keep in mind that buy and hold is no panacea. Too many investors think that they're buying and holding until one or more markets crash, which leads many to panic, sell out at the bottom, and end up with big losses.
As for looking frequently when managing asset allocation, this is partly about juicing return but it's also about risk management, perhaps more so. It's no secret that big losses are usually preceded by big returns, and vice versa. Looking for the sweet spots on a systematic basis can quite valuable. The future is always uncertain, but looking backwards can reveal a familiar set of recurring patterns.
In my own money management and consulting travels, I run the numbers weekly across a broad set of asset classes, slicing and dicing markets by way of ETF proxies. I review market activity from a range of perspectives, such as moving averages and other risk metrics along with simple rolling returns. I don't do a lot of trading, but I do a lot of looking. It helps (quite a lot, in fact) to look at all the markets in context on a regular basis. Developing familiarity with the volatility, and how it evolves across markets and time, helps keep irrational fears in check and keep strategic context in focus.
This is less about speculating on what's going to happen tomorrow and more about staying fully informed about what's actually happened in the recent past in absolute and relative terms -- across the full spectrum of market betas. We still can't predict the future very well, but we can do a better job of dissecting the past. It's risky to confuse these two aspects as one and the same, but it's also hazardous to assume that one has nothing to do with the other.