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Getting Paid for Doing Nothing

Wednesday, February 21, 2018

I have had a number of clients who worked hard all their lives, accumulated a decent amount of money and are now living off their investments.

 

They may still work but do so at a more leisurely pace and the work is not primarily for the money any more.

 

One difficulty that arises is these clients want to invest the same way as they worked all their life, which is to put a substantial effort into their investments and to see that substantial effort paying off.

 

That is a great approach to investing in residential property where you can renovate the property, manage the tenants and do whatever maintenance is needed.

 

But that is not how it works when investing in commercial property or shares or bonds.

 

Here, the work and discernment is required in finding the right investments and/or the right adviser, but once a good adviser or good investments has been found, the best course of action is often to do … nothing.

 

Every action from that moment incurs transaction costs, often including taxes and allows a whole range of biases that are well-known to behavioural economics, to creep in and reduce returns.

 

This is graphically illustrated in a study a big investment manager did some years back where they went over their investors and checked which group of investors did best.

 

The group that did best were squabbling inheritors who fought over an estate. Yes, really. Why this group? If you have a multi-year dispute, the estate is frozen during that time and investments are difficult or impossible to change. This forced inaction was very helpful for returns.

 

Which group came next? That was people who had forgotten all about their investments and the same principle of inaction applies.

 

In other words, a good adviser starts out with the right investments and then while regularly reviewing, generally works hard with the client at doing nothing as that has shown itself to be time and again the best long-term strategy.

 

Different rules apply for short-term investments but for the long term, even through turmoil as we are having right now, doing nothing has shown itself to be the best sustainable strategy.

 

 

 

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