No Magic Pill

Ever notice how certain fundamental truths seem to transcend multiple industries? Chapter 4 of Super Freakonomics (Levitt and Dubner’s sequel to their best-seller, Freakonomics) cites (and I summarize) evidence from a series of widespread doctor strikes in Los Angeles, Israel, and Columbia, that shows the death rate dropping significantly, from 18% to 50%, in the areas where the doctors stopped working. Similar results, “an across-the-board drop in mortality”, according to the study, occur when large numbers of Washington’s doctors leave town for medical conventions. Their conclusion (well, that of their source):

when there are too many physician-patient interactions, the amplitude gets turned up on everything. More people with nonfatal problems are taking more medications and having more procedures, many of which are not really helpful and a few of which are harmful.

Note: One could interpret the study’s findings as indicating that doctors have an over-treatment propensity. While I imagine this may at times be the case, you have to consider what a tough spot physicians find themselves in. I.e., patient comes in desperate for attention, so what do you do, tell him it’s all in his head and send him home untreated and litigiously upset, or treat the symptoms – hoping he’s telling the truth in terms of other meds, habits, etc.?

One parallel to this presumed over-doctoring phenomenon would be the apparent over-managing of investment portfolios. For example; studies of long-term mutual fund results suggest that the average fund manager, for all his/her education (Harvard MBA, Wharton PhD, etc. (no kidding)) and the analytical resources at his/her disposal, can’t seem to muster enough net return to beat the plain old S&P 500. A fact that, in recent years, Vanguard’s founder John Vogel has exploited to the tune of the $billions his firm has coaxed into its index funds.

While, as an advisor, I (on behalf of my clients) have had the good fortune of finding a few funds that have consistently outperformed their bogies, I can relate the mutual fund study to my basic (unoriginal) belief pertaining to the individual investor – that the long-term holding (as opposed to market timing) of a diversified group of securities is the most sensible approach to portfolio management. In other words; the failure rate (under-performance relative to an appropriate benchmark, or, more critically, failure to meet the investor’s objectives) of the everyday portfolio, beyond a point, increases in cadence with an increase in activity. When I say “beyond a point” I’m referring to a point beyond normal maintenance, or preventive medicine, if you will. Which would be the periodic rebalancing to a suitable target allocation (an act which forces buying low and selling high (relatively), which, in effect, stymies the buy-and-hold-is-dead argument), the gradual transition to a more conservative target as one grows older, the ongoing investment due diligence (and the consequent adding/removing positions as warranted), and the proper weighting to given sectors. Beyond that, we’re, in essence, “taking more medications and having more procedures, many of which are not really helpful and a few of which are harmful”.

The book states:

most people who are rushed to the ER and think they are going to die are in little danger of dying at all, at least not anytime soon. In fact, they might have been better off if they simply stayed at home.

So what’s my point? Well, if you happen to be our client, please don’t misunderstand my intent; I absolutely welcome your ‘911’ call anytime you’ve allowed the market to turn you a bit (emotionally) sideways – and I promise you’ll not be dismissed with a take-two-Prozac-and-call-me-in-the-morning. I will in fact be very attentive to your concerns and we will indeed re-explore whether your allocation, etc. is consistent with your world at large. Notice I said “your world at large”… For any adjustments I might recommend will have everything to do with your personal circumstances (time horizon, income distribution rate if you’re retired, etc.) and your comfort level – and virtually nothing to do with today’s headlines…

Lastly; it’s very important that, to maintain your financial health, you perform the necessary maintenance - just as you do with your personal health (right?). Like your annual physical---and the inconvenient tests that go with it---you succumb to a little inconvenience when it comes to your financial well-being. Which would be, if you happen to be our client, the semi-annual meeting where we review your situation and consider whether the current asset allocation remains consistent with your objectives, time horizon and temperament. And please understand, while one’s doctor may prescribe meds to sooth one’s nerves and even enhance other aspects of one’s personal life, when it comes to investing, stress reduction is only achievable through proper planning and the proper mindset (stuff (volatility) happens), and, alas, there’s just no little blue pill that’ll keep your stocks up when the market’s not cooperating…