For Investors, There’s Power in Doing Nothing

The markets ebb and flow, and as if dancing to some rhythmic tune playing loudly in our heads, our emotions move as well. Up go the indices and up goes our pleasure at logging in to see our latest retirement account balance. Down go the indices and it’s stunning how strongly our fears tempt us to jump ship before our retirement plans take on too much water.

Wall Street Journal columnist Jason Zweig recently spoke into the emotional chaos that describes many investors’ brains. Tucked into the middle of a reflective article entitled Saving Investors From Themselves was this gem:

Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

Zweig explained,

From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.

But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.

My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do.

Zweig noted research showing that investors who receive frequent news updates about their investments earn lower returns than those who get no news. The fewer the updates, apparently, the fewer the chances for emotional overreactions.

New York Times columnist Carl Richards made the same point in a column that included fascinating research about soccer goalies and whether their odds of success would improve if they simply stayed put during penalty kicks (you can already guess the answer).

At SMI, we don’t know how many of our members meticulously follow our mechanical, unemotional, data-driven recommendations. However, based on blog comments and other feedback, it’s a fair bet that there’s a decent amount of emotion-driven improvising going on.

So, Zweig’s conclusion warrants repeating:

Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

How good are you at doing nothing about your investments when your emotions are screaming at you to do something?

Matt Bell is Associate Editor at Sound Mind Investing. Since its founding by Austin Pryor 23 years ago, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice. Matt is also the author of four personal finance books published by NavPress, including Money, Purpose, Joy: The Proven Path to Uncommon Financial Success.

Publication date: August 26, 2013