The Art of Letting Go
by: Grant Blindbury
I
sometimes come across articles that I feel investors would enjoy, and
last week one of them caught my attention in particular. The author is Jim
Parker, vice president in the Communications group in Sydney, Australia of
Dimensional Fund Advisors, and he talks about the Art of Letting Go.
By Jim Parker (with permission) In
many areas of life, intense activity and constant monitoring of results
represent the path to success. In investment, that approach gets turned on its
head. The
Chinese philosophy of Taoism has a word for it: “wuwei.” It literally means
“non-doing.” In other words, the busier we are with our long-term investments
and the more we tinker, the less likely we are to get good results. That
doesn’t mean, by the way, that we should do nothing whatsoever. But it does
mean that the culture of “busyness” and chasing returns promoted by much of the
financial services industry and media can work against our interests. Investment
is one area where constant activity and a sense of control are not well
correlated. Look at the person who is forever monitoring his portfolio, who
fitfully watches business TV, or who sits up at night looking for stock tips on
social media. In
Taoism, by contrast, the student is taught to let go of factors over which he
has no control and instead go with the flow. When you plant a tree, you choose
a sunny spot with good soil and water. Apart from regular pruning, you leave
the tree to grow. But
it’s not just Chinese philosophy that cautions us against busyness. Financial
science and experience show that our investment efforts are best directed
toward areas where we can make a difference and away from things we can’t
control. So
we can’t control movements in the market. We can’t control news. We have no say
over the headlines that threaten to distract us. But
each of us can control how much risk we take. We can diversify those risks
across different assets, companies, sectors, and countries. We do have a say in
the fees we pay. We can influence transaction costs. And we can exercise
discipline when our emotional impulses threaten to blow us off-course. These
principles are so hard for people to absorb because the perception of
investment promoted through financial media is geared around the short-term, the
recent past, the ephemeral, the narrowly focused and the quick fix. We
are told that if we put in more effort on the external factors, that if we pay
closer attention to the day-to-day noise, we will get better results. What’s
more, we are programmed to focus on idiosyncratic risks—like glamor
stocks—instead of systematic risks, such as the degree to which our portfolios
are tilted toward the broad dimensions of risk and return. Ultimately,
we are pushed toward fads that the financial marketing industry decides are
sellable, which require us to constantly tinker with our portfolios. You
see, much of the media and financial services industry wants us to be busy
about the wrong things. The emphasis is often on the excitement induced by
constant activity and chasing past returns, rather than on the desired end
result. The
consequence of all this busyness, lack of diversification, poor timing
decisions, and narrow focus is that most individual investors earn poor
long-term returns. In fact, they tend to not even earn the returns available to
them from a simple index. This
is borne out each year in the analysis of investor behavior by research group
Dalbar. In 20 years, up to 2012, for instance, Dalbar found the average US
mutual fund investor underperformed the S&P 500 by nearly 4 percentage
points a year.1 This
documented difference between simple index returns and what investors receive
is often due to individual behavior—in being insufficiently diversified, in
chasing returns, in making bad timing decisions, and in trying to “beat” the
market. Recently,
one of Australia’s most frequently quoted brokers broke ranks from the industry
and gave the game away on this “busy” investing. In his final note to clients
before retiring to consultancy work, Morgan Stanley strategist Gerard Minack
said he had found over the years that investors were often their worst enemies.2 “The
biggest problem appears to be that—despite all the disclaimers—retail flows
assume that past performance is a good guide to future outcomes,” Minack said. “Consequently,
money tends to flow to investments that have done well, rather than investments
that will do well. The net result is that the actual returns to investors fall
well short not just of benchmark returns, but the returns generated by
professional investors. And that keeps people like me employed.” It’s
a frank admission and one that reinforces the ancient Chinese wisdom: “By
letting it go, it all gets done. The world is won by those who let it go. But
when you try and try, the world is beyond the winning.”
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