You have a bespoke financial plan, tailored to your current circumstances and long-term goals, so you can rest assured that your investments are guided by strong evidence-based decisions and that your portfolio is well-diversified and tailored to your appetite for risk.
So far, so fantastic.
But what if you couldn’t touch it – no, not even for minor tweaks – for 10 years?
You’re forbidden from checking on the performance, making any kind of adjustments, and absolutely, under no circumstances, can you change course because of something you read in the news.
If that makes you feel uncomfortable, you’re not alone. Many people might even go so far as to suggest such an idea is unthinkable. Surely investing means you must pay close attention and regularly fine-tune your decisions about where to invest your wealth.
Here’s the thing – if you did take a hands-off approach to investing, you may find that the method could lead to greater success.
Why the 10-year test may work better than you imagine
The 10-year test isn’t measuring whether your investments will rise every single year. Indeed, history shows that such a result would be highly unlikely – markets are unpredictable and don’t always trend upwards. Temporary dips are natural, and while they may not always happen as predicted, are an expected part of being an investor.
The challenge is in remaining invested, even when market volatility leaves you feeling unsettled.
When things become uncomfortable, many investors let themselves (and their investment strategy) down by making poor decisions through knee-jerk reactions. For example:
- Selling during a decline that proved temporary
- Switching strategies before the old one had a chance to perform.
In most cases, investors fail when they allow short-term discomfort to dictate their behaviour.
In short, investors who stick to the 10-year test rules tend to be more successful in reaching their long-term goals, thanks to their ability to take a disciplined approach to investing.
Understanding why you need to act could help you to resist the urge
Investment growth doesn’t happen overnight. It happens over time – slowly, sometimes ploddingly so. There’s no measurable daily progress and no clear signs that things are going according to plan.
If you did want to see the day-to-day progress, you wouldn’t be able to tell anything from stock prices. You’d find it in the businesses themselves – by walking through the offices of the world’s greatest companies and seeing teams innovate and solve problems in real time.
Here’s the rub: the majority don’t have that level of access.
Instead, we check prices and tinker with our portfolio, while consoling ourselves that we’re at least able to do something, rather than nothing.
And yet, this tinkering amounts to unhelpful interference, and is more likely to lead to your long-term investment strategy failing – because every “tiny tweak” disrupts the effects of compounding, and with every emotional response you run the risk of turning a paper loss to a real one.
And the more you tweak, the further you stray from your original plan.
As Charlie Munger, Berkshire Hathaway’s former vice chair and second-in-command to Warren Buffett, said: “The first rule of compounding: Never interrupt it unnecessarily.”
In our experience, investors are far more likely to do lasting damage by cutting short good investments before they’ve had time to work than by making the occasional poor choice.
How to perfect the art of “doing nothing”
Doing nothing doesn’t mean you should entirely ignore your finances, never review your financial plan, or pretend the stock market doesn’t even exist.
Rather, doing nothing means you trust the long-term strategy and avoid making decisions based on your emotions.
Your financial plan is designed around you and your goals. Your investment portfolio may not increase in value every single year, but it’s one that you can stick with through each market cycle, knowing it’s designed to withstand the knocks.
To perfect the art of doing nothing, you need two things: discipline and patience.
Then you simply need to make a positive decision to stick with the plan, even when events are screaming that it’s all going wrong.
And always remember, if you’re tempted to do something, we’re here to help you understand the bigger picture and reassure you that doing nothing is the right decision.
