4 Moments When “Stay the Course” is the Wrong Investment Advice

4 Moments When “Stay the Course” is the Wrong Investment Advice

The worst January start for U.S. stocks since 2009 should get your attention. If you’ve been hiding underneath a rock or hibernating in a cave-like dwelling, it’s time to come out. “A little sunlight is the best disinfectant,” as Judge Brandeis might say.

Most global stock yardsticks from China (NYSEARCA:ASHS) to Japan (NYSEARCA:EWJ) and even the United Kingdom (NYSEARCA:EWU) have already crashed 20% or more. Thankfully, the Dow Industrials (NYSEArca:DIA), Nasdaq Composite (Nasdaq:ONEQ), and S&P 500 (NYSEARCA:VOO)  are not yet in a bear market. That’s the good news. The bad news is since the average investor (both amateur and professional) underperforms the market, it’s safe to say the typical investor is doing much worse versus the 6% to 10% losses already experienced by U.S. stock benchmarks since the start of the year.

What does it mean?

It means the pathetic rhetoric that investors should “do nothing,” “stand still” or “hold the course” is the wrong advice.

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Think about it this way: Will a misaligned portfolio suddenly fix itself because a person promises themselves to be extra diligent and patient? Will a 20-year time horizon or longer instantly become the magical fix for a person with the bad habit of buying the wrong assets at the wrong prices? Will saving even more money than a person is already saving automatically convert them into becoming a truly great investor? Who besides fairyland believing experts buys this propaganda?

Now, let’s examine five concrete reasons when “staying the course” is absolutely something you should never do.

Reason #1: If the performance of your investment portfolio is significantly worse vs. a blended benchmark of index ETFs that closely resembles your asset mix over a relevant time frame – DON’T STAY THE COURSE.

Reason #2: If the cost of your investment portfolio or retirement plan is considerably more vs. a blended benchmark of index ETFs that closely resembles your asset mix- DON’T STAY THE COURSE.

Reason #3: If the tax liabilities of your investment portfolio is considerably more vs. a blended benchmark of index ETFs that closely resembles your asset mix – DON’T STAY THE COURSE.

Reason #4: If the risk character or volatility of your investment portfolio isn’t 100% compatible with your age, goals, risk profile or risk tolerance – DON’T STAY THE COURSE.

Reason #5: If your portfolio doesn’t have an adequate margin of safety – DON’T STAY THE COURSE.

In summary, the grand idea that investors should universally “stay the course” and hold a portfolio of investments no matter what the market is doing is supremely negligent advice. Bull markets mask portfolio flaws, but bear markets inevitably exploit these weaknesses and convert them into harmful matter.

Since most people do not have architecturally sound investment portfolios (I know this because the tiny sample of $125 million in Portfolio Report Cards I’ve done is a microcosm of the much larger investing masses), it means most people should most definitely not “stay the course.”

Finally, this explicit (and uncomfortable for some) advice applies in all types of market cycles.

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One comment on “4 Moments When “Stay the Course” is the Wrong Investment Advice
  1. Leonard Taube says:

    The idea that one should unilaterally never stay the course is one that I find difficult to accept, unless the author was suggesting that stay the course does not make sense only in those examples he illustrated (in which case I do agree that there were issues with each of those). While it is true that if someone’s portfolio is unbalanced, allocated improperly based on one’s age & time horizon, or is composed of investment vehicles with high fee structures than yes, one should fix those issue immediately….and then stay the course. As John Bogle says, “buy & hold is eternal”. “Time is your friend”. If one has a long time horizon, and has a well diversified portfolio of stocks & bonds (preferably index stock owning mutual funds with low fees or broad based index ETFs which track the market index & they don’t trade them) which are allocated properly, the best advice is to stay the course & tune out the noise. The average investor with a long time horizon should give no thought as to what’s happening in the market today. They should concentrate on what they can control…what they own, how much they own and in what proportions. When the market is unkind, that is in fact the best time to stay the course (as long as one is properly diversified) when Wall Street throws a sale. Again, to quote John Bogle, don’t “do something…just stand there”. There’s wisdom in those words which are as true today as they have always been. Build a well balanced portfolio using the instruments I noted above, contribute regularly regardless of what the market is doing, rebalance every year and stay the course. These are the lessons that history teaches is the way to build wealth, slow & steady.

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