I take a cyclical view on things. This means I can sometimes go years without making big changes in my views or portfolio. This is a very intentional construct and I think it’s one that most people should adhere to. After all, you don’t want to be irrationally long-term which usually results in huge amounts of short-term permanent loss risk. But you also don’t want to be so short-term that you take no risk. As we find with so many things in life moderation is the key. Hence my cyclical or multi-year perspective on things.
Resolving this temporal problem isn’t the only reason for this though. We know that taxes and fees are two of the most important frictions in a portfolio. And the best way to reduce taxes and fees is to take a long-term perspective. Again, a multi-year or cyclical timeframe blends perfectly with maximizing your real, real returns.
Of course, this is easier said than done. We live in a world dominated by “what have you done for me lately” narratives. And worse, we are confronted with our own biases that make us feel comfortable when we’re doing something. After all, letting your portfolio float in the wind feels very uncontrolled and often times uncomfortable. Activity is the way in which we try to “control” the markets. Of course, you can’t control the decisions of other market participants. And study after study shows that more activity is correlated only with higher fees and lower real, real returns. Yet the allure of greater control pulls us in.
Activity is the illusion of control in exchange for lower real, real returns. Luckily there is a happy medium here. There is no need to be irrationally long-term or short-term. But it takes a great amount of discipline to reject the illusion that activity creates control. For most, that illusion (and the sales pitch of “market beating returns” that often goes with it) is too enticing to reject.