Thursday, May 5, 2011

Contradictory Investing Advice

“Stick to your investment plan but be prepared to make adjustments.” Advice like this is usually presented as a nuanced version of the familiar advice to stick to your investment plan. I see it as simply self-contradictory.

Advising people to be prepared to adjust an investment plan is not difficult to sell. Sticking blindly to a plan is good advice for most investors, but a sophisticated person like you can do better by being prepared to make subtle course corrections when necessary. I hope your BS meter registered something with that last sentence.

By “sticking to an investment plan” we usually mean adhering to particular asset allocation percentages and saving some percentage of income regularly. “Making adjustments” usually means changing your asset allocation percentages. You can’t make changes and stick to your plan all at once. It’s one or the other.

Sometimes changing your investment plan really does make sense if the underlying assumptions of the plan are no longer true. For example, if one of your funds changes its focus from an index of large-cap stocks to trading in jumping bean futures it definitely makes sense to find another fund. Another good time to make a change is when you wake up to the fact that you’re paying 3% of your assets each year in fees.

However, if you decide to make adjustments to your plan because of market conditions and your conviction that some asset class is destined to move in a particular direction, you are not just adjusting your investment plan – you are changing it, at least temporarily.

Just like any active investor, if you tinker with your plan regularly, you should keep track of how these hunches work out. Write down the change and sometime in the future work out whether the change caused you to make or lose money compared to the strategy of sticking with the original plan.

If you’re like most investors, a lifetime of tinkering will add up to losing money compared to sticking with a plan. However, if you don’t actually check, it’s easy to hallucinate that your guesses have worked well. I’d rather have more money than have a false good feeling about my financial clairvoyance skills.


  1. It sure is hard to stick to a plan that appears to be worse than an alternative plan. Seems like the breaking point for a plan is just before it suddenly starts working. It takes such a long time to get a sizeable data set, and our brains are wired to over-emphasize recent performance and extend it linearly into the future.

    In short, the study of statistics is hard.

    I really do like your advice to track your performance against another method you've abandoned or an easily attainable index fund. I do that myself, and when things are going bad, I'm not sure what to do.

  2. @Gene: "When things are going bad, I'm not sure what to do." I've been there. I've since voted with my feet (figuratively) by abandoning active stock-picking.

  3. I like the following gems:

    "We are bullish on the market. That is not to say we can't have a correction"

    "The markets will be volatile"

    "Are you a gold bug?" My thoughts. Is she saying he's an insect? I suppose he could get crushed!