In a recent post, I provided an update on the performance of the Sleepy Mini Portfolio. The portfolio was started in August 2007 with an initial investment of $1,000 and $1,000 was added to the portfolio every quarter since then. As of May 31, 2010, the portfolio is slightly below book value. Some readers looked at the performance and expressed impatience at the slow growth in the value of the portfolio. “When will the fruits of index investing show its face?” asked one reader.
To be honest, I’m a bit surprised by such comments. A portfolio like the Sleepy Mini Portfolio is designed to provide satisfactory returns over the long-term by (a) keeping investing costs very low and (b) keeping emotions in check by putting money to work regularly. Over the long-term — an investment horizon of at least 20 years — the portfolio is highly likely to provide satisfactory results. By “satisfactory”, we mean returns that provide a healthy premium over the risk-free rate. The level of the premium would depend on how much is allocated to equities and the valuation level of equities over that time frame. The plan has a very good chance of achieving satisfactory results provided investors have the patience to stick to it through thick and thin.
It is the sticking-to-it part that some investors seem to be having trouble with. They are judging the final result of a long-term strategy based on a time frame of less than three years. It’s a bit like judging a team’s chances for the Stanley Cup based on the first five games. When an investing strategy encounters mediocre results — as any strategy, passive or not, that calls for investing in risky assets is likely to at one time or the other — investors get a hankering to throw out the play book and try something — anything — new. But, they have to ask themselves: how likely are they to stick with the new strategy when it runs into a rough patch in the future?
Studies such as DALBAR (see post Investors Behaving Badly ) consistently show that investors underperform their investments due to performance chasing. We can all become better investors simply by picking a reasonable investment strategy and sticking to it. The endless search for the perfect strategy is a big reason why the average investor experiences such poor returns.