The Tao of Wealth Management

The path to success in many areas of life is paved with continual hard work, intense activity and a day-to-day focus on results. In long-term investment, however, that philosophy is turned upside down.

The Chinese philosophy of Taoism has a phrase for this: “wei wu-wei”. In English, this translates as to “do without doing”. It means that in some areas of life, such as investment, greater activity does not necessarily translate into better results.

By the way, that doesn’t mean that you should do nothing. For instance, it’s important to regularly rebalance a portfolio so that money is reallocated from strongly performing assets to maintain a desired asset allocation.

Rebalancing is a disciplined, premeditated activity based on each person’s circumstances. It contrasts with the “busyness” of reflexively following investment trends and chasing past returns promoted through the media.

In other words, investment is one area where constant tinkering is not necessarily correlated with success.

Look at the person who fitfully watches business TV or who sits up at night researching stock tips. That sort of activity can be counter-productive. It can add cost without any associated benefit.

In Taoism, students are taught to let go of things they have no control over. To use an analogy, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you leave the tree to grow.

Likewise, it may be best to direct your investment efforts to areas where you can make meaningful decisions.

These include taking account of your own preferences and sensitivities when choosing strategies, diversifying your portfolio to moderate the ups and downs, being mindful of the impact of fees and exercising discipline when emotions threaten to blow you off course.

Many people find it tough to apply those principles because the media tends to look at investing through a different lens. The focus is on today’s news, which is already priced in, or on speculating about tomorrow. It can be interesting, sure. But is it relevant to your long-term plan? Probably not.

So people caught up in the day-to-day events constantly switch money managers based on past performance, attempt tactical changes in asset management and respond in a knee-jerk way to news events that turn out to be noise.

Again, the assumption underlying these approaches is that if you put more effort into the external factors, that if you adjust your position constantly based on short-term movements in the market, you will get better results.

Unfortunately, people may end up earning poorer long-term returns than are available to them. Historically, even a majority of professional asset managers have struggled to earn the returns offered by a simple index.

And keep in mind that this doesn’t take into account the actual returns earned by end-investors, many of whom further damage their chances by holding concentrated portfolios, over-trading, chasing past performers or attempting to time the market.

A few years ago, one Australian broker gave the game away on “busy” investing. In his final note to clients before retiring to consultancy work, this individual said investors were often their worst enemies.

“The biggest problem appears to be that, despite all the disclaimers, retail flows assume that past performance is a good guide to future outcomes,” he said.

“Consequently, money tends to flow to investments that have done well, rather than investments that will do well. The net result is that the actual returns to investors fall well short not just of benchmark returns,but the returns generated by professional investors. And that keeps people like me employed.”

Ultimately, that’s just another reminder of the benefits available to disciplined investors who stay focused onwhat they can control. According to an ancient Chinese proverb: “By letting it go, it all gets done. The world is won by those who let it go. But when you try and try, the world is beyond the winning.”

Article from Jim Parker, Dimensional Fund Advisers