August 18, 2010

Patience (Investing)

It never was my thinking that made the big money for me.  It was always my sitting.  Got that?  My sitting tight! -Edwin Lefevre

This blunt warning was issued in Lefevre's 1923 fictional memoir, and treated by many financial advisers like the Bible.  Some 77 years later, behavioral finance professors Terrance Odean and Brad Barber's research into transactions by some 66,000 households between 1991 and 1996 found that those who traded least earned seven percentage points a year more than the most frequent traders.  Fast forward 10 more years and here we are, nothing has changed except that costs to own the market via an index are even more cost effective!
The moral: Once you arrange your assets into your ideal allocation, don't tinker.  Rebalance once a year to keep your mix on track, but otherwise, sit tight.

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