Doing Nothing Is Doing Something

One of the oft-heard questions from fellow investors during periods of market volatility was, "What should I do now?"

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It is a natural question. When markets move like a roller coaster, there is an expectation that investors should do something, e.g., buying, selling or making some sort of adjustments to their portfolios.

However, sometimes the best decision is to do none of the above.

While doing nothing is mostly thought of as being indecisive or lazy, but in investing, it could be a form of a deliberate action taken.

The Urge To Act

Humans are conditioned to equate action with progress, i.e., getting things done. Problems in our personal and working lives are taken care of by doing something, so when issues popped up, the urge to solve them is there.

The catch is that markets do not reward activity, but rather they reward good decisions.

Has Anything Really Changed?

Let us assume that an investment portfolio fell 10% over a few weeks.

Has the investor's financial objective changed?

Has the investment horizon shortened?

Have the businesses of the securities held permanently deteriorated?

Has the portfolio drifted sufficiently to warrant rebalancing?

If the answer to these questions is "no", then perhaps the investment plan requires no immediate action. The market has changed, but the portfolio itself may still be doing exactly what it was designed to do.

Knowing When To Act

This does not mean investors should never act.

There are occasions when action is necessary, like business fundamentals have deteriorated, asset class allocation drifted too far from the target percentages, and/or personal circumstances has changed. In such cases, being inactive may be the wrong decision to take.

The important point is that decisions should be driven by one's investment philosophy and methodology, not by the latest market headlines.

Takeaways

One of the least known lessons in investing is that not every situation demands a response.

There are times to buy. There are times to sell. And there are times to simply allow a well-constructed portfolio to continue doing its job.

Doing nothing is not the absence of a decision. When supported by a sound investment framework, it is a decision in its own right.

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