What is to be learned about portfolio strategy?

Always keep the objectives of the portfolio in mind.

On December 30, the WALL STREET JOURNAL had a summary of 2013 stock performance.  Unlike some summaries in other media that focus on the biggest gainer or the biggest loser, the WALL STREET JOURNAL's summary was more oriented toward what is relevant to individual investors.  The title, “Winners of 2013: Boring Investors” pretty much summarized why much of the financial press chose to talk about other topics at the end of 2013.  Boring just does not sell to the media.  They want excitement.  Further, the subtitle “Buying and Holding U.S. Stocks Paid Off Big This Year,” indicates why 2013 results would not appeal to the financial service industry.  The financial service industry is oriented toward transactions.

The authors, Tomi Kilgore and Tom Lauricella, point out that: “So-called dumb-money strategies, which involve buying and holding a plain-vanilla portfolio of U.S. stocks, did much better than the more complex approaches employed by hedge funds and other professional investors.”  They go on to point out that: “…the Dow Jones Industrial Average goes into the final day of 2013 with a gain of 29% once dividends are included, while the S&P 500 index has climbed 32% with dividends.” That is the type of year that will make any equity strategy look smart.  As the saying goes, “There's nothing like the bull market to make an investor look smart." 

To the authors’ credit, they compare a buy-and-hold strategy to a number of alternative strategies often touted by financial service industry representatives and the media.  They also point out a number of aspects of this year's performance that were quite unique, and how the uniqueness of 2013 can be misleading.  In particular, they point out how the uniqueness of this year could be misleading if taken to be indicative of how to manage one's total portfolio. 

Another refreshing aspect of the article is that it focuses on actual performance.  Far too much of the media's coverage is just backward looking.  It is always possible, in hindsight, to identify trades and trading strategies that would have been profitable.  It is worth noting that it is equally possible to identify trading strategies and trades that would have been laughable.  What an investor needs to focus on is what investments and trades make sense and profit when applied in a forward-looking situation.  Contrary to popular belief, over the long-run, buy-and-hold stacks up quite well against any alternative.  The only exception is that rebalancing makes sense when applied in the context of the time horizon for the investor.

When focusing just on equities, their article is very telling.  It is particularly timely given the infatuation with tactical market timing among the financial service industry and media.  One does not have to be a rocket scientist to realize that tactical market timing would appeal to the financial service industry because it involves more frequent trading.  For the media, which has to find something to write or talk about, it is equally appealing.  But, in neither case is the focus on how investors make money.  Their agendas are quite different from helping you make money.

At the aggregate level, in terms of market strategy, nothing more is required than understanding that the media is an entertainment business, not an investment advisory service.  Further, every investor needs to understand the financial service industry makes its living from fees on transactions, trades, activity within accounts, and media coverage that facilitates gathering assets, not necessarily from the profitability of the account.  There is no maliciousness involved.  It is just a difference between the service being provided, and the service that the investor needs in order to profit.

So, last year provided ample evidence that the individual investor needs to think hard about the motives of anyone who discusses investments.  It also highlights a point often made by investment counselors.  Nothing is more important than understanding why one is investing.  If excitement is the objective, tactical market timing and constant monitoring of every potential influence on the market is warranted.  It is entertaining, but if profit is the objective, boring is the most reliable approach.  One does not need to look for a moonshot in order to make money investing.