Via Negativa-What Should Fund Investors Not Do?Rutuja Chavan
Fund investors spend a great deal of time deliberating the positive steps they can take to achieve better investment results. While this is an important endeavor, there is something easier and more effective that should come first – deciding what they should not be doing.
Nassim Nicholas Taleb highlighted the benefits of eliminating errors in his book ‘Anti-Fragile’ where he describes the theological idea of “via negativa”, which is a means of explaining God by what it is not, rather than what it is. Taleb broadened this concept to contend that it is easier and more beneficial to stop negative activities than to attempt to identify new, and constructive behaviors.
Investors can eliminate the mistakes that they know are damaging and costly far more easily than discovering positive behaviors that might improve their fortunes. The more complex and unpredictable the environment, the more likely this is to be true.
This is an approach that should be adopted by fund investors, who face an immeasurable line-up of choices and decision points. Rather than obsessing over how to define the precise allocation to the right funds at the right time – an incredibly difficult task – it would be more productive to first concentrate on the actions investors should avoid. Prioritize omission over commission.
So, what is it that fund investors should not do?
1) Don’t buy into a fund after an extremely positive performance: Abnormally strong performance on the upside is highly unlikely to persist, investing after a spell of stellar returns is an asymmetric bet.
2) Don’t be concentrated by the fund, manager, style, or asset manager: Concentration is the surest path to severe losses, it implies investors know far more about the future than they do.
3) Don’t predict short-term market movements: Investors cannot predict the short-term behavior of markets or funds that invest in them. Hence, they should avoid basing their decisions on expected short-term market movements.
4) Don’t check short-term fund performance: Short-term fund performance is typically nothing more than random noise, checking it frequently encourages poor decisions.
5) Don’t use performance screens: Using performance screens will highlight the funds which have done well historically. As fund performance tends to mean revert, the Author cannot think of a worse idea than to filter funds based on historic returns.
6) Don’t keep selling underperforming funds to buy outperforming funds: This is a common behavioral trait that makes investors feel good at the time of doing it, but compounds into a detrimental tax.
7) Don’t buy thematic funds based on strong back-tests: If a fund is being launched based on an in-vogue theme with a stellar back-test the chances are investors are already too late.
8) Don’t invest in active managers if one cannot bear long spells of poor performance: Even skillful active managers will underperform for long periods, if that is unappealing, invest in index funds.
9) Don’t invest in funds if one does not understand how they make money: Investing in things investors don’t understand is a recipe for disaster.
10) Don’t persist with active managers when they start doing something different: The circle of competence for active managers is usually incredibly narrow, if they are venturing outside of that, investors should avoid them.
Source: www. behaviouralinvestment.com by Joe Wiggins
Asset Multiplier Comments:
- Each of these prohibitions attempts to establish a simple investing process that can be effective during highly uncertain environments which especially creates a lot of unnecessary noise.
- Putting a stop to hasty decisions is as important as embracing positive investing actions. These will ensure that investors’ capital is protected and the process of wealth creation does not get hampered.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”