The path to success in many areas of life is paved with continual hard work, intense activity and a day to-day focus on results. In long-term investment, however, that philosophy is turned upside down.
The Chinese philosophy of Taoism has a phrase for this: “wei wu-wei”. In English, this translates as “do without doing.” It means that in some areas of life, such as investing, greater activity does not necessarily translate into better results. That doesn’t mean that we should always do nothing.
The principles
In Taoism, students are taught to let go of things they have no control over. To use an analogy, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you leave the tree to grow.
Likewise, financial science says you are best to direct your investment efforts to things you can control. These include taking account of your own preferences and sensitivities when choosing investment strategies, diversifying your portfolio to moderate the ups and downs, being mindful of the impact of fees and exercising discipline when emotions threaten to blow you off course.
Now while that makes sense, many people find it tough to apply those principles because the media tends to look at investing through a different lens. The focus is on today’s news, which is already priced in, or on speculating about tomorrow. It can be interesting, sure. But is it relevant to your long-term plan? Probably not.
Ignoring the noise
People caught up in the day-to-day constantly switch money managers based on past performance, and respond in a knee-jerk way to news events that turn out to be noise. Again, the assumption underlying these approaches is that if you put more effort into the external factors, that if you adjust your position constantly based on short-term movements in the market, you will get better results. But often, this is not the case.
Disciplined investors will benefit
Several years ago, one Australian broker gave the game away on “busy” investing. In his final note to clients before retiring to consultancy work, this individual said investors were often their worst enemies.1
“The biggest problem appears to be that, despite all the disclaimers, investors assume that past performance is a good guide to future outcomes,” he said. “Consequently, money tends to flow to investments that have done well, rather than investments that will do well.”
Ultimately, that’s just another reminder of the benefits available to disciplined investors who stay focused on what they can control, or as the ancient Chinese proverb says: “By letting it go, it all gets done.
The world is won by those who let it go. But when you try and try, the world is beyond the winning.”
31 January 2025
Sources:
- Downunder Daily, Gerard Minack, Morgan Stanley, 16 May 2013.
Article provided by Dimensional Fund Advisors
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