When I was 14 years old, I set a lofty goal. I wanted to race my bike at the Olympics. The harder I worked, the better I got. I read about how to train. I read about tactics. I worked so hard my organs hurt.
I accepted that the harder I worked, the better I would get. In Malcolm Gladwell’s book, Outliers, he wrote about the “10,000-hour rule.” That’s the time it takes, he says, to truly master something. Geoff Colvin agrees in his book, Talent Is Overrated.
But when it comes to investing, the opposite is true. The less you think about the market, the better your returns. It might be the only place where laziness beats the pros.
Rick Consalves co-founded AmericaFirst Capital Management, LLC in January 2007. He’s the firm’s President and Chief Executive Officer. He also manages the AmericaFirst Income Fund Class A (AFPAX). Donald Trump would like it.
Mr. Consalves probably works hard. I’m sure he’s very smart. But grit and knowledge do little for investors. When it comes to investing, the sloth kicks butt. Morningstar puts the AmericaFirst Income Class A fund in its tactical asset allocation category. That means Mr. Consalves isn’t just picking domestic stocks. He’s strategically trying to figure out whether U.S. stocks, international stocks or bonds are set to move. When he makes his decisions, he trades to gain an edge.
If a fund manager traded half of a fund’s holdings in a given year, the turnover rate would be 50 percent. If a manager traded every stock within a 12 month period, the turnover rate would be 100 percent. Mr. Consalves fund’s turnover was a whopping 349 percent last year.
Morningstar reports that this fund had about 57 percent in U.S. stocks, 35 percent in bonds and 5 percent in international stocks at the beginning of this year. But it’s likely different now.
Despite all that effort, however, virtually every available benchmark has given the fund a beating. Since its July 1, 2010 inception to March 27, 2017, U.S. bonds are 5 percent ahead. International stocks are 35 percent ahead. A balanced stock index (60% stocks, 40% bonds) is 77 percent ahead. And U.S. stocks are 109 percent ahead.
Brains And Hard Work Don’t Pay For Investors
Over the five year period ending March 27, 2017, the AmericaFirst Income Fund Class A (AFPAX) averaged a compound annual return of 2.7 percent per year.
You might think that I’m picking on this guy. But I’m not. His IQ is likely leagues above my own. Yet I’m picking on his method. Tactical asset allocation strategies don’t consistently work. Morningstar tracks the performance of 316 tactical asset allocation funds. Over the five year period ending March 27, 2017, they averaged a compound return of just 3.63 percent per year.
The Couch Potato portfolio has half its money in a U.S. stock index, with the other half in a U.S. bond index. If an investor rebalanced it once a year, it would have averaged a compound return of about 8 percent per year during the same five year period. Just one of the 316 tactical asset allocation funds kept pace with the potato.
Investment fees hurt their returns. But their tactical strategies made things far worse.
Vanguard’s research team wouldn’t be surprised. Joseph Davis, Roger Aliaga-Díaz and Charles J. Thomas published a report that looked at popular metrics used to predict stock market returns. They examined price to earnings ratios; cyclically adjusted price to earnings ratios; trailing dividend yields; corporate earnings growth trends and a consensus of predicted earnings growth. They then looked at five different measurements of economic fundamentals, followed by three different multi-variable valuation models.
They concluded that, “Stock returns are essentially unpredictable at short horizons…this lack of predictability is not surprising given the poor track record of market-timing and related tactical asset allocation strategies.”
Smart investing is simple. Build a diversified portfolio of low-cost index funds. Take 10 minutes a year to rebalance your portfolio. Don’t listen to experts who try to predict where stocks or bonds are headed. Market timing is for chumps. When it comes to the stock market, thinking less and doing less will give you higher profits.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas