By Michael Woods
Based on a recent study by Fidelity Investments, the answer could be yes. Fidelity looked at all of their clients’ investment accounts for the period between 2003 and 2013 with the goal of determining what type of retail investor was able to achieve the highest returns. The result of this study showed that individuals who had forgotten about their accounts or had passed away, leaving their accounts inactive during the estate process, provided the best returns. If we assume that while “snowbirding” you are spending more time on the golf course and relaxing under the awning of your RV than tinkering with your investment portfolio, then these results should make you happy.
But how is it that the forgetful and deceased can outperform the thoughtful and alive? Much of it revolves around the growth of the internet and all-day business news as investors are now bombarded with information they feel they need to act on. This is evident in the average holding period of U.S. stocks, which has dropped from seven years in 1960 to closer to one year today. This drop in the amount of time investors are willing to hold an investment before selling it goes against the old saying, “it is not about timing the market but about time in the market.”
Warren Buffett has said that his holding period is “forever,” and from 1987 to 2009 there were four times when the price of his holding company dropped by 37% or more. During these down periods, there is no doubt that media were predicting that “Warren has lost his touch,” and many investors felt the pressure to sell and move on. But even with these significant pullbacks, an investor who stayed invested in Warren Buffett’s company over time, without trying to time the market, would have produced market-beating returns. There are plenty of other companies that have offered investors above-average growth if only they had the conviction to ignore the short-term noise and focus on the long-term plan.
This short-term focus and desire to act also shows up in the average investor’s returns, as noted in a 2015 study by research firm DALBAR. This study looked at the past returns of mutual fund investors in the United States relative to the markets, and it showed that the average equity fund investor underperformed the benchmark by a staggering 7.27% over the past 30 years. While fees did play a small role in this underperformance, the major reason was psychological factors, evident as investors chased performance and tried to time the market. This phenomenon is further evidenced by a 2014 Morningstar, Inc. study that demonstrated that the average mutual fund gets a better return than the average mutual fund investor. The reasons cited in the Morningstar report are very similar to the DALBAR one: investors have a bias to buying and selling too frequently and investing in what performed well in prior years. This essentially leads to buying high and selling low – the exact opposite of the conventional investing wisdom.
Having time in the market as opposed to timing the market has two other potential positive effects for investors. The first is lower fees – if you are trading less frequently, your costs should be lower. The second, applicable only to non-registered assets, is that you could potentially defer your capital gains taxes by realizing these gains later in life and less often. Both of these effects can reduce outflows from your portfolio, which can have a compounding effect over time.
So the next time you are on an extended road trip or teeing off on the first hole, you can rest assured that you may be doing yourself a favour by ignoring the news and the short-term gyrations of your portfolio. With any luck, your portfolio may perform as well as if you had forgotten about it altogether!
Michael Woods, CFP, CIM, is a portfolio manager with Odlum Brown Limited
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Limited may affect the applicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisor before acting on any matter discussed herein. Individual situations may vary. Member-Canadian Investor Protection Fund.