Be centered, be still . . . revisited

Back on March 11 of this year, we wrote a post entitled "Be centered, be still" in which we cited research demonstrating that most investors make their most costly mistakes not only during downturns but after downturns. Often, mistakes after downturns come in the form of missing market recoveries, due to an earlier decision to bail out.

The title of that earlier post makes reference to a word that we as portfolio managers believe represents a very important concept in investment management -- the idea of being centered. By centered we mean "remaining within a consistent discipline; not making rash changes that represent a departure from the discipline."

Being centered does not mean "doing nothing" but rather it means continuing to act in line with the principles of an investment process. During times of great turbulence, many are tempted to either abandon their process (if they ever had one) or alter it to suit the "mode of the moment."

Tragically, an abundance of research supports the conclusion that most investors do not have anything close to a consistent process. In fact, as we have argued, the evidence strongly suggests that even most "financial professionals" or "financial advisors" do not have a consistent process, as we explain in "Investor behavior . . . or advisor behavior?" and the other articles linked at the end of that post.

In the absence of a consistent set of principles, investors (and their advisors) become like waves tossed about by the swirling winds, chasing whatever has worked lately. Research has decisively shown that over periods of years, such an approach is very unreliable.

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