When to Change

Adam M. Grossman

IN THE BOOK OF JOAN, a tribute to the comedian Joan Rivers, her daughter Melissa shares some of her late mother’s quirks. Among them: Her mother always drove 40 miles per hour. Regardless of where she was—on the highway, in a school zone, in the driveway—she always drove 40 miles per hour. Melissa’s conclusion: For passengers, this could be hair-raising, but at least her mother was consistent.

When it comes to investing, consistency is definitely a virtue. It’s best to pick a strategy and stick with it. But the above story illustrates that consistency can also be risky. When carried too far, it can cross over into stubbornness—and that can be a problem.

As you manage your finances through this volatile period, you might be wondering where to draw that line. When should you stay true to your strategy and when does it make sense to change course? The world is a noisy and opinionated place. To make better decisions, I would turn down the volume on these five voices:

1. Expert opinions. At one point during the 1990s bull market, Federal Reserve Chair Alan Greenspan made headlines when he warned about “irrational exuberance.” But if you had heeded his warning, you wouldn’t have fared very well. Yes, the stock market eventually dropped—but not before it more than doubled in the three years following Greenspan’s warning. Even after the market finally slumped starting in early 2000, it never fell as low as it was on the day Greenspan made his famous remark. The lesson: No one, no matter how celebrated, knows the future. You might make a note of his or her view, but never treat it as gospel.

2. News media. It may seem like common sense to tune out the shrill voices on financial news channels. But a 1987 academic study actually proved this. Psychologist Paul Andreassen demonstrated that investors with more access to financial news engaged in more frequent trading and realized worse investment returns. People on TV might sound like they know what they’re talking about, but that still doesn’t mean their investment advice will be accurate.

3. Those with an agenda. In March, hedge fund manager Bill Ackman warned in a TV interview that “hell is coming.” Later, it was revealed that Ackman had a big short trade in place—that is, he was positioned to benefit from a further drop in stock prices. As you make financial decisions, keep in mind that those with a microphone in front of them might be using it to further their own goals, not yours.

4. Pessimists. Author Morgan Housel has pointed out that pessimists sound smarter than optimists: “In investing, a bull sounds like a reckless cheerleader, while a bear sounds like a sharp mind who has dug past the headlines.” It’s important to keep this phenomenon in mind as you weigh the onslaught of market opinions.

5. Political partisans. This election, more than others in recent memory, seems fraught with emotion. But according to a Vanguard Group analysis, market returns in election years don’t differ meaningfully from returns in non-election years. Ditto for the level of volatility. Vanguard’s conclusion: Yes, elections are a big deal, but not necessarily for your portfolio.

If the above are situations where you should turn down the volume, what would warrant a change in your financial plan? Here are three possible triggers:

Personal circumstances. This may seem like the most obvious reason to revisit your financial plan, but it’s often overlooked. That’s because, for most people, financial change occurs incrementally. But cumulatively, small changes can be transformative. That’s why it makes sense periodically to revisit the pillars of your financial plan. Where to begin? I’d start with an area that’s often overlooked: insurance. With apologies for being morbid, it’s worth confirming that your life and disability coverage are sized appropriately for your family’s current needs. If the size of your family or your nest egg has changed, it may be worth updating your coverage.

New information. I argued above that you should tune out TV talking heads and expert prognosticators. But that doesn’t mean you should tune out everything. If new and meaningful information comes to your attention, you shouldn’t feel anchored to past decisions. Suppose you’ve come to understand the true cost of a whole-life insurance policy or the risk level of a mutual fund you own. In such situations, you shouldn’t hesitate to make a change.

Structural change. Why are experts so ineffective at making predictions? Last week, fellow financial advisor Ben Carlson helped explain this phenomenon. In a nutshell, the problem is that the world is always changing. “The world of finance,” he says, “is littered with people who are experts on an earlier version of the world…. There are a handful of investment principles that are evergreen, but the market structure is constantly in a state of flux.”

This has always been the case, but it’s especially true this year. If the pandemic and the election weren’t dominating the headlines, the Federal Reserve’s dramatic new policies would be big news. For many investors, these changes warrant a different strategy. Again, if the facts have changed, you shouldn’t feel anchored to past decisions.

What if a change in your plan does seem warranted? For some situations—like the life insurance example above—there may be no reason to delay after you’ve gathered the facts and done your analysis. Similarly, if you identify a key risk in your investment life, I wouldn’t delay. Recently, for example, I saw a portfolio that had more than 25% allocated to one stock. It was a great stock—Amazon—but that’s still too big a position. That’s the sort of change you should make right away.

In other cases, however, a more gradual shift might be wiser. In his book Mastering the Market Cycle, Howard Marks encourages readers to think in nuanced—rather than binary—terms. “Get the market’s tendency on your side,” he writes. “The outcome will never be under your control, but if you invest when the market’s tendency is biased toward favorable, you’ll have the wind at your back….”

What does this mean in practice? In the investment world, people endlessly debate the importance of market valuations. Today, in particular, people are concerned that the stock market is overvalued. But the fact is, no valuation metric is perfect. While there’s some connection between valuations and future returns, that relationship isn’t ironclad—Greenspan’s “irrational exuberance” pronouncement being just one notable example.

That’s why, when it comes to portfolio changes, I think it makes sense to implement changes gradually. If you’re dollar-cost averaging into the market today, you might go a little more slowly than you would have six months ago. You might also favor market segments that are still depressed, like value stocks. Meanwhile, if you’re rebalancing your portfolio or withdrawing spending money, you might weight your sales toward the S&P 500, which has seen the biggest run-up and where valuations look most extended. But it doesn’t need to be all or nothing. As Marks says, just try to get the wind at your back.

The bottom line: Consistency is a good thing, but sometimes it does make sense to shift course. You don’t want to always drive the same speed. The key is knowing when to speed up and when to slow down.

Adam M. Grossman’s previous articles include Just Say NoEyeing the Exit and Making Time. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.

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