Why Hands-Off Investing Pays Off

Business|Why Hands-Off Investing Pays Off

Don’t do it.

Don’t touch your investments.

That’s the simple, yet hard-to-practice, lesson of a new of study of investor behavior by Morningstar, the financial services company. It found that over the last decade, most people hurt themselves by trading. Once they put their money into stock and bond funds, they would have been much better off if they had just left their money alone.

In fact, Morningstar found that, on average, the actual returns of fund investors were significantly less than the posted market returns, a discrepancy explained by poor trading decisions — buying when the market was high and selling when prices were low.

Over extended periods — say, 30 years — this drag on returns produces chilling results: a reduction in the money in an average investor’s portfolio of more than 18 percent, according to Morningstar calculations performed at my request.

“Investors hurt themselves when they are prone to inopportune trading,” Jeffrey Ptak, managing director of Morningstar Research Services, said in a phone conversation. Finding ways of resisting the temptation to buy and sell is critically important.

This isn’t easy, for several reasons.

First, much of the financial services industry is dedicated to incessantly selling new products and services, including advice, intended to keep you buying and selling the latest new thing. That kind of behavior generates handsome profits for asset managers and advice-givers, but not necessarily for you.

Second, the swings of the stock and bond markets provide plenty of motivation for fleeing to the sidelines — or, when the markets are rising, for jumping into hot investment prospects with all the money you can muster. This may work out well for some people, but for most of us, the markets are too complex to be outsmarted. Historically, it has been better to buy and hold.