Here’s a few thoughts on lessons learned from soccer … and how they could save us a bundle in the Stock Market.
In honor of my son, who used to play soccer, and some of his friends who are still on the pitch.
Goalies have one of two tendencies – either dive left or dive right.
But shots on goal are nearly equally divided: a third to the left, a third to the right, and a third right up the middle. The goalie who dives left or right leaves two-thirds of the goal exposed.
The best advice for a goalie is to stand in the middle and do nothing.
But who does that?
It’s part of our human condition that we have a bias towards action. It’s a behavioral flaw, in a way. Most people would prefer to try something, even if it’s the wrong thing, than to do nothing.
Behavioral Finance applies the science of Behavioral Psychology to our decisions about money, because the behavioral obstacles are fairly predictable at this point and a good “choice architect” can design behavioral solutions to solve for these problems.
Fidelity did a study a few years ago, trying to determine if there was a correlation between activity in one’s investment account and actual return. Fidelity wanted to uncover what behavior led to the best results. Not surprisingly, the results showed a very positive correlation … or that is to say, a very positive negative correlation.
Fidelity determined that the more often a person logged in or checked their account, the lower their return. And those who made the most changes in their accounts or reallocated their accounts after logging in earned the least on their investments. The (NEGATIVE) correlation was undeniable.
In fact, the two groups in their study that had the highest returns were the two groups that did nothing. Those who did the best were either dead … or forgetful.
- Dead people. That’s right. The accounts of the deceased had the highest performance.
- And the forgetful. Those who forgot they had a Fidelity account were the second highest group in terms of performance.
The best advice (for investors and goalies) is to do nothing.
But that’s hard!
Retirement plan participants should do nothing (or nearly nothing) beyond putting their money in a risk-adjusted, diversified portfolio, like a Target Date Fund. And then leave it alone.
Micromanaging it produces a smaller return.
Timing the market almost never works.
As long as the diversified portfolio isn’t an expensive Managed Accounts program … just step back and leave it alone. (As an aside, not all Managed Accounts programs are bad … only the ones that cost extra. If your 401k plan is still paying extra for Managed Accounts you’re being taken advantage of, because today reputable providers offer Managed Accounts at no additional cost.)
From a behavioral perspective, the best possible investment would be a fund that “locks it up” for 40 years, perhaps one that doesn’t even report returns except on an annual basis … or better yet, once a decade. That’s what investors probably need. (Regulators would never allow it, but behaviorally that’s probably what we need.)
Just like the goalie who stands right in the middle has the best chances, statistically speaking, of stopping the ball, the 401k participant who does nothing profits from inaction when action almost always equates to loss.
Who knew? The toddler who stood in the goal motionless, watching the butterflies, might have been at the apex of his or her game! ?
And this has never been more important than right now. The market’s up hundreds of points one day and down hundreds of points the next day. (Ironically, both movements, up and down, are blamed on the same phenomenon, like the tariffs and trade war or the pandemic and vaccines, because the “experts” don’t have a clue what the market is doing. Wall Street tries to manage this illusion of expertise.)
Here’s a typical (bad) week.
- Monday, the market is down … a lot. Investors leave the office only to hear the crushing reports on their way home. The evening news reinforces the “Chicken Little” cry about the sky falling. And so … Chicken Little (the average investor) logs in and makes a change in their account, perhaps reallocating a bit, or perhaps grossly overcorrecting and moving everything to cash to get out of the market.
- Tuesday … the trade goes through that the investors made on Monday night. They were too late to move out of the market before it fell, so the reallocation at this point merely locked in Monday’s losses.
- Later in the week … the market rebounds sharply. The average investor decides to jump back in. But because the trades in mutual funds settle at the end of the day, the trade executed isn’t at the beginning of that climb. The trade back into the market happens at the high point after the market closes.
- Effectively, the person in this example sold low, and bought high. If they repeat this very many times, they won’t have anything left.
A real-life example of this happened last year during the pandemic and the dramatic drop in the market for one of our clients. (Our “clients” are institutional, meaning that our client is the employer who sponsors the 401k retirement plan rather than the employees within that plan.) A plan participant (one of the employees of one of our clients) made changes in their account that cost them a considerable amount of money.
- The stock market hit a new high in February of last year (on February 12, 2020, just prior to the pandemic) before plummeting to a low on March 23rd.
- A plan participant moved everything to cash about a week before the low hit in March, locking in tons of losses. (Making a move a week before or after the high in February would have locked in the gains … but it wasn’t known at the time that February marked the high.) Once the markets began to drop the best thing to do was NOTHING, as hard as that sounds and as crazy as that seems.
- This particular employee, who moved everything to cash, moved back into the market in May as the market was rising. And then, in August, they wondered why their 2nd quarter statement (from June 30th) showed a loss of 11% when most of their co-workers who did nothing were up 7% or more.
- I had to break the news that they hadn’t lost 11% … but they had actually lost 18% … the difference between their actual loss and what their gain would have been if they’d done nothing at all. And an 18% loss cost this particular employee hundreds of thousands of dollars.
I get that it’s hard to do nothing, but I’m begging you to step back from the emotions of the situation and understand that statistically speaking, standing there in the middle gives you the best advantage of providing the best defense.
The next time you are tempted to make any big moves in the market … just remember how successful the goalie is who stands in the middle and does nothing … or remember how “smart” the dead investors look.