Is Your Portfolio Getting Enough Sleep?

“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” – Seth Klarman

We could all use more sleep.  The older we get, the busier we are.  And the busier we are, the more challenging it is to get the requisite 7-9 hours a night that doctors recommend.

But we need it.

Without proper rest, it’s only a matter of time before mental, emotional and physical fatigue sets in. Your portfolio is no different – it needs sleep too!

There is no shortage of concerns your portfolio could lose sleep over if you allow it to:

• Brexit
• A hard landing in China
• The price of oil
• The price of gold
• Donald
• Hillary
• Dollar Strength
• Dollar Weakness
• NIRP
• ZIRP
• Baby Boomers
• Millennials
• The potential for a Fed hike in July, December, 2017…
• Bill Ackman’s crusade against Herbalife
• Whether or not the iPhone 7 will be a flop
• A bubble in Silicon Valley unicorns
• George Soros, Carl Icahn or any other “market wizard” proclaiming imminent doom

So what can an investor do to get some more ZZZs for their portfolio? Turns out, the same rules of thumb that can improve our own sleeping habits can benefit our investments as well:

• Reduce stress: How does a portfolio reduce stress?  Three words: diversification, diversification, diversification.  In a recent blog post, my friend Isaac Presley of Cordant Wealth Partners hits on six forms of portfolio diversification: by company, by sector/industry, by asset class, by strategy, by geography and by time.  Diversification means different things to different people, but regardless of portfolio composition the objective should be to eliminate any unwanted or uncompensated risk.  Ultimately, it comes down to knowing what you own and why you own it and sizing your positions appropriately so that everything matters, but no one thing matters too much.  Taking the guesswork out of investing can reduce portfolio stress and allow the intentional risks we bear deliver the returns we seek.

• Eliminate distractions: Getting a good night of sleep with the TV blaring in the background or your iPhone screen in your face is a recipe for disaster.  Similarly, a portfolio that is constantly inundated with CNBC talking heads, “shiny new toy” investment products and fear inducing click-bait is bound to keep itself up all night with anxiety.  Uncertainty is omnipresent in financial markets.  Some headlines will manifest themselves as real risks, but the overwhelming majority will prove to be no more than noise.  Rather than expend energy trying to discern one from the other in the pursuit of short-term profit, one can focus on the only returns that matter: long-term returns.  A portfolio guided by an defined investment philosophy that is grounded in decades of academic and empirical research of the factors that drive long-term results stands a much better chance at ignoring the inevitable distractions that confront us.

• Stick to a sleep schedule: A major component of a healthy sleep schedule is its consistency.  Going to bed and waking up each night at roughly the same time can do wonders.  It’s easy to come up with excuses to stay up late or to hit the snooze button a couple of times but more often than not it throws off our rhythm and we regret it.  When emotions (and volatility) are running high, our impulses can override a well designed financial plan. Tying your portfolio to a written Investment Policy Statement (IPS) with built in rules and processes is a great way to “stick to the schedule” and automate good decision such as periodic rebalancing and dollar cost averaging.  In his book A Wealth of Common Sense, author Ben Carlson discusses this concept:

A rules-based investment plan can help investors stay disciplined, but a plan can’t do it on its own.  You have to stay out of your own way and follow through, as well. Automate as many good decisions up front as you can to avoid having to make huge moves during times of market stress and emotional duress.

• Move the bedroom clock so you can’t see it: If you’re having trouble falling asleep, checking the time every 5 minutes is only going to magnify your problem.  The same goes for portfolio returns.  It’s tempting to frequently monitor and check on the progress of your investments, especially in today’s world where we have the on-demand access to our account information directly from our smart phones.  Technological advances in performance reporting can be great, provided they don’t lead to poor behavior.  Myopically focusing on short-term results can have a devastating impact on our long term outcomes.  Morgan Housel said it best in a recent blog post:

Compound interest is like planting oak trees. One day’s progress shows nothing, a few years’ progress shows a little, ten years shows something big, and 50 years creates something absolutely magnificent.

• Pay attention to what you eat and drink: Drinking a bunch of caffeine or devouring a pint of Ben & Jerry’s at 9 PM may seem like a great idea at the time, but when it comes to sleep and diet the “garbage in, garbage out” rule applies.  A portfolio loaded with “junk food” investments like triple leveraged or inverse ETFs, toxic VIX products, concentrated positions in speculative “story” stocks and actively managed funds with exorbitant expenses will only lead to disappointment.  A portfolio without direction will take you nowhere.  Instead, a “lean diet” focused on reducing turnover, minimizing taxes, and keeping fees in check will have your portfolio in dreamland in no time!

While it may not feel like it at times, most investors’ portfolios have horizons that can be measured in decades, not years.  A sleep deprived portfolio is going to have a hard time doing its job over such a long period of time.  By taking the proper actions and developing good habits, your portfolio can stop counting sheep and get back to its real job: climbing the “wall of worry” and letting capital markets take care of the heavy lifting.

So get your portfolio some rest.  It will thank you down the road in the form of a successful investment experience.

A Wealth of Common Sense by Ben Carlson (Amazon)

Six Types of Diversification to Include in Your Portfolio (Cordant Wealth Blog)

Explaining Investing In Ways That Make Sense (Motley Fool)