The best performing investors are ones who are dead

Posted by Gavin Chau

Yes, you read that correctly. Fidelity, one of the biggest asset managers in the world, performed a study on their best-performing client brokerage accounts. Over a 10-year period, they found that the highest returns came from the ones where the account holder was dead. The second best were the ones that had forgotten they had investments. Of course, I don’t recommend dying as a good investment strategy.

Why is this the case?

Most of the time, the market rewards investors who get into position and then do nothing. While it seems simple, it’s a lot harder than it sounds. Successful investing can be extremely boring, and it can be hard not to watch the news and tinker with your investments to try and squeeze out every ounce of performance from your hard-earned capital. But the market rewards patience and punishes those who give into emotions.

Dead investors aren’t usually reading the news and panic selling as investments go down, nor are they prone to panic buying as the market is soaring. Peter Lynch, who averaged a spectacular 29.2% annual return with the Magellan Fund, referred to this as “cutting the flowers and watering the weeds.”

In addition, frequent buying and selling incurs transaction costs and triggers capital gains tax events. Transaction costs are mainly brokerage costs for equities and, of course, things like stamp duty when it comes to property.

If we look at the performance of active fund managers, the smartest, most highly paid people with the best training and education and access to the best models, wearing the shiniest suits and the most expensive watches…. It’s clear that they’re really no different from us mere mortals, either. Over a 20-year period, 93% underperformed the index, and 90% underperformed over the last 10 years.

Even working in the industry with constant reminders, I have made the mistake of over-trading in various investments. Over the decades, I’ve probably made just about every mistake possible. From FOMOing in at the top of the cycle to cutting an ‘underperforming’ asset only to watch it skyrocket afterward. Fortunately, you won’t have to make those same mistakes, but it still takes constant reminders to stay sane – especially as the market is pumping… or dumping.

The good news is that property isn’t an asset class that lends itself to trading very easily, and I’ve personally never sold a property – there hasn’t been a good reason to. I just add to the portfolio when the holding costs drop to the point it allows me to.

At this stage of the cycle, many investors will want to outsmart the market and snipe at an opportunity when rates drop and their borrowing capacity rises, but there’s a lower than 10% chance that they will be successful. The simple truth is that by the time the average borrower gets a 20% increase in borrowing capacity, the market will have moved by 20% or more. It would have been better for people to make a move when prices were at a macro low and capture that 20% equity growth. The only true metric to look at is prices rather than borrowing capacity when it comes to market timing, and the good news is that it is now.

What else?

While we’re on the subject of death, there’s one final thing I can leave you with. That is a list of the regrets of the dying, compiled by a palliative care nurse, Bronnie Ware. If you had to distill them into a single unifying rule for the post-industrial man, it might be something like:

“don’t be a coward and allow yourself to be crushed into a form just to fit your circumstances.”

Here are the five most common regrets:

Don’t ignore your dreams
Don’t work too much and neglect your family
Say what you think, and don’t suppress your feelings
Cultivate friendships
Be happy

I think there’s probably a lesson in there for all of us. Most of the time, it’s better to buy good investments, don’t overpay, then forget about them. Spend the rest of your time with your loved ones and doing what you’re passionate about.

Posted by Gavin Chau, on 9th Apr 2024