I just caught up with a young fellow that I set up with some investments back in 2000. He was a student at the time, and he has moved around a bit in the years between then and now, so it’s been harder to get a hold of him over the years.
The reason that I mention this is that, although we periodically did some minor account maintenance on his mutual funds, for the most part his investments have remained untouched for 7 years.
The guy’s RRSP has an annualized return of 10.7 percent since 2000. His non-registered account has done even better, yielding an annualized return of 11.21 percent. These are decent performance numbers, but they are even more impressive given the very challenging market conditions that we saw from 2000 to 2003.
Now here’s the thing. Along the way many people, even myself at times, would have considered the investments that he owns to be less than attractive. There certainly would have been the temptation to fiddle with the portfolio along the way. And if I could have gotten a hold of him through the years I can’t say for sure that we wouldn’t have made some moves, maybe even moves that wouldn’t have turned out as well as the stuff that we initially set up.
As it turns out, at one point one of his investments had the notoriety of being named the worst mutual fund in the country. That’s saying something. To be the very worst out of thousands of competitors is not an easy task to accomplish.
The pundits have scarcely been much kinder to his other holdings either. Two of his funds are widely despised, and have suffered extended periods of investor redemptions.
A fourth fund has been so bad at times that I am actually a little surprised that the sponsoring company hasn’t found a reason to bury it by consolidating it into a fund with a similar mandate. His fifth and final holding hasn’t done much since 2001 either.
So there you have it. Five dogs. If I were to meet with the fellow for the first time today not one of the funds that he owns is on my short list of products that I utilize. And I wouldn’t use all five of them for this size of account. But that’s now, and this was then.
Well, that’s all fine and good, but then how does one explain how this fellow ended up with double-digit returns from out-of-favour investments through one of the worst bear markets in modern history?
Simple. We didn’t touch the portfolio along the way.
Somewhere along the way I heard a great analogy that has stuck with me. Your investment is like a bar of soap. The more you touch it, the smaller it gets.
You know, it’s funny. There are lots of people who invest for the long term, and yet they check their account statement all the time. Some of them check it every day.
Many of these “investors” get their knickers in a twist if their investment has a bad year, or a bad quarter, or a bad month, or even a bad week. And they are tempted to make changes. It’s quite common that these changes that don’t work out. A fellow named David Dreman expressed this when he said, “How quickly investors flock to better-performing mutual funds, even though financial researchers have shown that the ‘hot’ funds in one time period very often turn out to be the poorest performers in another.”
Why do people want to try to change horses in the middle of a race? A lot of it has to do with the constant micro-analysis that the media subjects on investment funds. A lot of it has to do with how frequently an investor looks at his long-term investment. People, it’s supposed to be long-term. Don’t touch it.
Imagine if the assessed value of your house appeared in the local newspaper every day for all to see. Would you sell it if the assessed value declined one day? Of course not. Real estate is usually a long-term investment. So why would it be different with your investment funds? By the way, for those of you who think that real estate doesn’t fluctuate, you probably don’t remember the 1990’s – a decade of stagnant Canadian real estate prices – even in Vancouver, the hottest real estate market in the country. Famed Canadian economist John Kenneth Galbraith once said, “Genius is a short memory in a bull market.”
One more quote for you. The legendary Ben Graham said, “An investor’s worst enemy is not the stock market but one’s self.” Your investment is like a bar of soap. The more you touch it the smaller it gets. So don’t touch it.
