If you wish to lower the volatility of your portfolio, stop looking at it so often.
— Rick Ferri, CFA (@Rick_Ferri) October 27, 2018
This tweet by Rick Ferri is counter-intuitive. If you want to lower volatility, look at your portfolio less often?
Rick is a highly regarded investment adviser across the pond, but we’re not just going to take his word for it, are we? So let’s look at the cold hard data.
The aim here is to see if the percentage of times an investor sees a negative return vs. a positive return differs based on how frequently they check their portfolio.
For this, we use monthly historical returns data for global equities and bonds from Jan. 1926 to Dec. 2017. We back-test four hypothetical portfolios with a global equity/bond split of 30/70, 50/50, 70/30 and 100/0. They’re known as Betafolio 30, 50, 70 and 100. The portfolios are re-balanced annually and we apply 1% a year in fees.
Here we look at the percentage of times you see a cumulative positive vs. negative return for monthly, one, three, five and 10-yr rolling periods, representing how frequently an investor checks their portfolio. Within our dataset, we have 1092 monthly periods, 1080 rolling 1-yr periods, 1056 rolling 5-yr periods and 972 rolling 10-yr periods.
Across the four portfolios, if you look at your portfolios on a monthly basis, you see a negative return around one in every three months.
But suppose you resist the temptation to constantly check your portfolio each month. Instead, you only look at it once every twelve months? The result is that you see a negative return about once every six years. So, 85% of yearly return is positive!
What if you’re one of the level-headed ones, prepared to only look at your portfolio every three years? Well, you improved your investment experience significantly. Over 90% of times, you’ll see a positive return. Your portfolio’s value is higher than the last time you checked in nine out of 10 times.
What about once every five years?
Are you brave enough to look at your portfolio only once a decade?
If you check your balanced portfolio (50/50) on a monthly basis, you’re depressed and/or tempted to punch your financial adviser one-third of the time. If you do this once a year, you’ll see a negative result once every six years. Do it once every three years and you’re singing, dancing and praising the gods of the capital markets 98% of the time. Hallelujah!
Of course, there is the issue of making sure that your portfolio is on track to achieve your goal. How do you achieve that, if you never check?
Here’s an idea; what if there’s a way to only check the portfolio once a year and when you do this, you only see whether you’re on track to meet your goals? In other words, you see the probability of meeting a capital or withdrawal need at a given date. No charts. No investment return. All you see if whether or not you’re on track to meet a stated goal.
We are of course taking it for granted that you’ve made the right investment choices in the first place. This is not to suggest that you should bury your head in the sand if you haven’t. But once you’ve worked out the right portfolio, leave it the hell alone! Be like the legendary investor Warren Buffet, who often quips ‘benign neglect, bordering on sloth, remains the hallmark of our investment process.’
There, the best volatility-managed solution in the world. And it costs you zilch in fees.
.
Director
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
Read Full Bio
Read Full Bio
