The Financial Benefits of Being Lazy
Highly motivated people get ahead in almost every profession.
Whether you’re a doctor, salesman or janitor, your success is largely dependent on how much you get done…
And the speed at which you do it all.
But investing is an exception to this rule. Decades of market data point to a surprising conclusion: There are big financial benefits of being lazy.
You could even argue that being an active, high-energy investor is a handicap.
We humans aren’t very logical creatures. Our emotions and egos often trump our common sense, causing us to make stupid decisions. These behavioral biases tend to make investors buy high and sell low.
That’s why being lazy pays off in the financial world. Sticking to long holding periods and simple asset management strategies allows us to protect ourselves from our own impulses.
The Financial Benefits of Sloth
The Bible says sloth is a deadly sin. But being sluggish can actually help your portfolio.
For evidence, look no further than one of history’s most successful investors, Warren Buffett. One of his best-known quotes is “Our favorite holding period is forever.” And Buffett’s recent track record proves the strategy has merit.
Nearly a decade ago, the Berkshire Hathaway (NYSE: BRK) chairman made a million-dollar bet against the Protégé Partners hedge fund. Buffett invested in an unmanaged index fund, pledging to leave it alone for 10 years. He wagered that this strategy could beat the returns of one of the world’s most prestigious hedge funds. They had the same initial value and the same time limit.
The bet started on New Year’s Day 2008, and it expires on New Year’s Eve 2017. So technically, there’s still a year and some change before Buffett can officially claim victory. But, as of now, he’s beating the active managers by a factor of three.
Even when you include the fat commissions that Protégé’s managers have taken, Buffett is still up more than 50%.
The first year of the bet marked the beginning of the worst economic downturn since the Great Depression. Yet Buffett’s passive strategy is still winning big.
Buffett understands the importance of tempering his impulses. In 2008, he was faced with a systemic meltdown of the global economy. And he still didn’t consider it a good enough reason to freak out and sell things.
The lazy long hold works. And as The Oxford Club’s Chief Investment Strategist Alexander Green recently pointed out, it almost always beats active management. If you’re too lazy or forgetful to hit “sell” when the market fluctuates, consider it a blessing.
Being Lazy With Your Strategy
Buffett’s bet illustrates another fallacy of active investing. A complicated asset allocation strategy doesn’t give you any advantages over someone who follows a simple template.
Proponents of “lazy portfolios” have known this for a long time. A simple asset allocation strategy made of index funds can beat the most scrupulous stock pickers. Even the laziest portfolio possible – a world stock index and a U.S. bond index – generally outperforms Wall Street.
Alex Green is a bit less lazy than the two-fund portfolio crowd. But he’s still a firm believer in “set it and forget it” asset allocation. That’s why he developed the Gone Fishin’ Portfolio. It’s a simple, balanced strategy made up of index funds.
Gone Fishin’ investors rebalance their portfolios just once a year. They hold indexes of domestic stocks, foreign stocks, bonds and gold. And for more than a decade, they’ve done better than the rest of the stock market.
Financial writers often reference a Fidelity study about successful investors. According to the legend, Fidelity’s highest-returning accounts belonged to people who forgot about the accounts or died.
I say “legend” because, unfortunately, this study doesn’t exist. It’s a massive case of circular reporting stemming from a single blogger who made up the story in 2013.
But despite the mythical nature of that Fidelity study, its conclusion is sound. We investors are not as smart as we think we are. The financial benefits of intense and complex investing strategies pale in comparison to the financial benefits of being lazy.
Just avoid panicky transactions and overcomplicated allocation strategies. That way, you can continue to be lazy – and rich – in your golden years.