A friend recently sent a screenshot of his Goalwise app’s dashboard.
His CAGR was now negative from being +15% at the beginning of the year.
"What should I do?", he asked.
I was reminded of this tweet by Richard Thaler - a Nobel prize winning economist (who also appeared in the movie Big Short) - in which he gives some timeless advice for such situations:
"Inhale, exhale. Repeat. Then watch ESPN. "
Thaler did not mean that ESPN had better stock market commentary or forecasts.
He meant that the best way to deal with market volatility was to ignore it (and do something else).
Now my friend is not much of a sports buff so I gave him the following advice:
"Set up auto-debits for your SIPs and uninstall the app".
Market volatility is a feature, not a bug. It is what gives rise to the risk-reward premium of investing in the markets.
No volatility = no risk = no reward (higher than FD returns).
Markets have been volatile in the past and they will continue to be so in the future as well. Just because you have started investing won't change this.
Tracking and reacting to the markets is in fact one of the worst ways to invest.
In an internal study done by Fidelity, they found that their best performing long term accounts were of people who had forgotten that they had an account with Fidelity.
'Set and forget' investing does not sound sexy but it works.
Numerous other studies have also found a negative correlation between activity and returns.
So what are the steps we can take to decrease activity and hence minimise ad-hoc decision making?
Here are a few:
- Invest according to your risk profile and goals. Optimise for peace of mind rather than returns.
- Don't try to time the markets.
- Set up auto-debits for your SIPs.
- Have a pre-determined reviewing period rather than whenever you see your portfolio.
- Expect some losses along the way.
- Turn off the market news.