We’ve written recently about the relationship between personality and financial behavior. And it’s a well-known fact that wealth accumulation and investment management is affected as much, if not more, by non-financial factors as by financial ones. Because financial outcomes depend so heavily on behavior, how you manage your emotions in connection with your finances plays a huge role in the type of investing and financial management experiences you have. In particular, the emotional urge to “do something” in response to short-term changes in market conditions often delays or derails many investors’ progress toward their long-term financial goals.
A recent article from the Morningstar investment research firm may confirm that even professionals can fall victim to this tendency. Morningstar looked at the performance of 34 tactical allocation funds: funds that maintain a mix of equities, fixed income, and other asset types. The funds seek to maximize performance by shifting the percentages of assets of each type in response to perceived or anticipated changes in market conditions. What Morningstar wanted to find out was whether investors holding tactical allocation funds would have fared better during the last ten years than those who held a classic 60-40 portfolio (60% equities and 40% fixed income, as represented by the Vanguard Balanced Index Fund) and made no changes to the portfolio.
SOURCE: Morningstar, Inc. Past performance is no guarantee of future results.
The results of the analysis were pretty persuasive. First of all, of the 34 tactical allocation funds included at the beginning of the period (2013), 22 went out of business before April 30, 2023, when the analysis concluded. And of the 12 that did survive to the end, not a single one came close to outperforming the “do-nothing” 60-40 portfolio. The average annual return for the period was 2.3% for the tactical allocation funds, compared with nearly triple that rate for the 60-40 portfolio.
In this case, even professional fund managers with the announced goal of “tactically” shuffling assets among categories to enhance yield were unable to improve on the gains investors could have gotten by simply buying and holding a 60-40 portfolio. (And by the way, the fees charged by managers who actively move assets around, in combination with the related trading expenses, also eat into the returns available to shareholders). Yet despite such factual results, the urge to try to anticipate market directions in order to improve investment outcomes is irresistible to most investors.
What’s the takeaway? First, it probably bears repeating that the instincts evolved by our hunter-gatherer ancestors are mostly ill-suited to application in the modern financial markets. The same adrenalin-driven response that enabled them to run away from predators doesn’t work as well when facing a bear market. Rather, what is typically called for is patience, commitment to an established long-term strategy, and confidence in the ultimate resilience of the markets. Over time, these attributes are likely to be rewarded.
Finally, it also helps to have an experienced guide. At Griffin Black, we provide our clients with the research, guidance, and resources they need to develop sound strategies for building and maintaining wealth. To learn more, visit our website to read about the “Dynamic Wealth Journey.”