This past week I fielded a phone call from a 55 year old woman who spent quite a bit of time with me on the phone, expressing her bewilderment at what to do with her investment portfolio.
She is a physician and an artist, and throughout the course of our discussion, it became clear that a lot of her mental energy that could be better spent in her career and her passion for art was being spent on questions like,
“I am so frustrated, what in the world am I going to do with my portfolio?” and,
“Can I retire on time?”
Which got me to thinking . . .
One of the primary benefits of building a “Coffeehouse” type portfolio is that it puts the pursuit of “performance” in perspective. There will always be another fund, another stockpicker, another trading strategy, that outperforms the one you currently embrace.
At what point do you say, “enough is enough.” At what point do you quit chasing performance?
I have highlighted this decision in a unique little game I devised 12 years ago called “Outfox the Box.” It is a simple exercise that drives this point home. Although it is possible to choose the $10,000 box, why do participants always stick with the $8,000 box? Inevitably they respond, “It isn’t worth the risk!”
In five words, they sum up why it makes sense to own a globally diversified portfolio of low cost index funds, instead of pursuing active management in an attempt to beat the market.
In my opinion, when someone chooses the $8,000 box, or in our case, a benchmark average, they maximize their return potential in the stock market.
On top of that, I have long felt that another significant benefit of building a “Coffeehouse” type of portfolio of low cost index funds is the peace-of-mind it offers you that you are doing the right thing with your investments, especially in down markets.
I witnessed this firsthand in my own portfolio (and the clients I work with), during the market decline of 2000-2002, when the S&P 500 index dropped over 43% during that stretch.
During that time period, I didn’t change a thing in my portfolio. Not only did I not change anything in my portfolio, I didn’t even think about changing anything. During those three years, even during the market’s steep decline, I knew my investments were positioned as good as they could be.
In light of the fact that I work as a financial advisor, and am constantly fielding calls from investors all over the nation, confused and bewildered, wondering what to do next with their portfolios, in my opinion, this “peace of mind” is priceless.
This “peace-of-mind” has been especially gratifying during the past two years, when we all have had to endure one of the more grueling bear markets in the past 70 years. During this period we have managed to survive two full blown bull and bear markets. I can hardly imagine trying to manage a portfolio, and the emotions that are attached, during this time period while trying to stay one step ahead of the thousands of different opinions put forth by financial pundits and stock market gurus.
It is a Friday morning, and I am finally catching up from my two-week trip to China. In the next week, I am going to be offering some reflections on that wonderful trip, both from an investing and non-investing standpoint (and maybe a few pictures!).
I am also going to share more reflections on the physician and artist who is still stewing over what to do with her portfolio . . .
so stay tuned.