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English Portfolio Management

Fixed or flexible intervals

According to the Boglehead philosophy, a mechanical plan must be developed and implemented. For the overwhelming majority of investors, I am convinced that this is the best possible approach: it is possible to contain overconfidence or avoid damaging behavior in the event of temporary market irrationality.

According to the Boglehead philosophy, a mechanical plan must be developed and implemented. For the overwhelming majority of investors, I am convinced that this is the best possible approach: it is possible to contain overconfidence or avoid damaging behavior in the event of temporary market irrationality.

A fresh article in the February issue of the Journal of Portfolio Management* offers us a contrarian view of making portfolio changes or ad-hoc market entries. Making portfolio changes based on signals would result in higher performance (for a given level of risk) than strictly following the investment horizon without dynamic response. Not reacting to new information until the investment horizon expires would be less efficient for them.

Although difficult to reconcile, these two views are not entirely contradictory. Besides long-term strategic views that determine a portfolio, tactical views can be based on signals that are more cyclical in nature and occur more frequently than changes in strategic views. A time horizon or plan should not discourage updating the portfolio when new information arrives. When an equity market experiences a sharp correction, as it did during the first quarter of 2020, a greater level of investment may be considered.

That an adjustment or investment does not always occur at fixed times should not, however, encourage frenetic activity. An unprepared person should certainly stick to a stricter plan or a narrower range between lower (in a period of high prices) or higher (when exceptional opportunities are available as in the first quarter of 2020) amounts to invest.

The risks are too high to make unprepared bets and the results can be disastrous. So it’s best to stick to a strict plan with possible upper and lower limits, while allowing for occasional entry points with higher equity investments.

*Work Harder: Diligent Rebalancing and Investment Horizon by Wai Lee and Pai Liu