Humans, like all creatures great and small, are biased toward action. It’s so ingrained in us, in fact, that occasionally our brains override conscious thought and force us to act.
If you touch a hot stove, your brain instinctively screams, “Act right now! Remove yourself from the source of the pain!” You don’t have a choice. Impulse takes over. You act.
But this bias that helps us survive – run from that lion, block that projectile from hitting your face, etc – is purely harmful to the long-term investor. As an investor, inaction is your friend.
But it’s important, paradoxically, that we differentiate inaction from inactivity.
Why Inaction is an Investor’s Friend
John Bogle – the founder of Vanguard – famously quipped,
My rule — and it’s good only about 99% of the time, so I have to be careful here — when these crises come along, the best rule you can possible follow is not “Don’t stand there, do something,” but “Don’t do something, stand there!”
John Bogle
That’s right. Don’t do something. Don’t bias yourself toward action. Just stand there. Actively choose inaction.
To understand why, we simply have to consult historical precedent. First, why might an investor want to take drastic action? To avoid pain! And what’s the cause of the pain? A downward bear market, where we see our account values dropping by 10%, 20%, or more.
Our brains instinctively think, “Do something! Avoid the pain! You’re exposing yourself to the painful stock market – so stop that! Sell your investments lest the pain gets worse!“
That’s the normal human response. Identify the cause of the pain and reel back from it. But stock market history shows us how harmful that behavior is to your long-term portfolio performance.
Selling because of losses serves to “lock in” those losses. That’s bad. And then you, like the rest of us, won’t have the gumption to buy back into the market to participate in its eventual recovery.
Action during bear markets is an investor’s enemy. Inaction is our friend.
Why Inaction is Different from Inactivity
But inaction isn’t the same as inactivity. It takes conscious effort to choose inaction.
It takes conscious effort to rebalance your portfolio, maintaining a predetermined asset allocation even during turbulent markets. It’s boring and simple, but you have to do it.
You need to actively choose to keep your cool. The secret of great investing is temperament. It’s hard to stay calm during a bear market. Our brains want to panic – we want to sell to survive. You need to actively choose not to.
It’s like meditation. You are choosing to sit there and do nothing. You are, paradoxically, actively choosing inaction.
The metaphor is even better, though, because as anyone who has ever meditated will tell you: meditation is hard! It’s challenging to quiet your brain and be still. After all, we’re biologically wired for action. We’re wired to think, to worry, to plan…everything but to sit and be still.
Investors choosing inaction works exactly the same. We must quiet the worried voice in our heads – “my retirement account just dropped how much?!” – and choose to wait out the market’s storm. Calm waters await us, if only we wait for them. Day after day, we must choose to wait, to stay calm, to be patient…
Don’t do something, just sit there. But don’t confuse that inaction with inactivity.
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-Jesse
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