E 4 Moments When "Stay The Course" Is Really Bad Investment Advice

The worst yearly start for U.S. stocks ever - even worse than scary years like 1929, 1987, 1974, 2000, and 2008 - should get your attention. If you've been hiding underneath a rock or hibernating in a cave-like dwelling, it's time to come out. "A little sunlight is the best disinfectant," as Judge Brandeis might say. 

Most global stock yardsticks from China to Japan and even the United Kingdom have crashed 20% or more. Thankfully, the Dow Industrials, Nasdaq Composite, and S&P 500 are not yet in a bear market. That's the good news. The bad news is since the average investor (both amateur and professional) underperforms the market, it's safe to say the typical investor is doing much worse versus the 7% to 10% losses already experienced by U.S. stock benchmarks over the past 6-months.

What does it mean? 

It means the pathetic rhetoric that investors should "do nothing," "stand still" or "hold the course" is really bad advice.

Think about it this way: Will a misaligned portfolio suddenly fix itself because a person promises themselves to be extra diligent and patient? Will a 20-year time horizon or longer instantly become the magical fix for a person with the bad habit of buying the wrong assets at the wrong prices? Will saving even more money than they're already saving automatically convert people into becoming truly great investors? Who besides fairyland believing experts buys this propaganda? 

Now, let's examine four concrete reasons when "staying the course" is absolutely something you should never do. 

Reason #1: If the performance of your investment portfolio is significantly worse vs. a blended benchmark of index ETFs that closely resembles your asset mix over a relevant time frame. 

Reason #2: If the cost of your investment portfolio is considerably more vs. a blended benchmark of index ETFs that closely resembles your asset mix. 

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Disclosure: None

Disclaimer: Ron DeLegge has analyzed and graded more than $125 million with his Portfolio ...

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Susan Miller 5 years ago Member's comment

Very sound advice.

Joe Economy 5 years ago Member's comment

The type of huge swings in the markets like we are experiencing now only go to reiterate the need for investors to diversify. Investors need to diversify across different sectors, diversify between investment type; stocks, bonds, precious metals, real estate, cash, and diversify on investment area ie Europe vs US vs Asia etc. For an example of effective diversification across stocks, take a look at Berkshire Hathaway's portfolio. http://warrenbuffettstockportfolio.com/ He has 35% of his stocks in financial sector but is nicely spread across all sectors. Also interestingly, Buffett increased his investments in European stocks with the view that government stimulus over there is in the process of boosting the markets, we all might want to watch him carefully before we buy or sell. One thing is for sure, it is not advisable to sell on the lows and buy the upswing. Do you agree?

Ron DeLegge 5 years ago Author's comment


Diversification is an obvious hedge, but it still doesn't provide full downside protection.

That's why having a margin of safety built into a portfolio is an absolute must. At the portfolio construction level, it's one of the three essential ingredients to a robust and properly built investment portfolio.

I wrote a research piece about margin of safety a few months ago, here's how it works: etfguide.com/does-your-portfolio-have-a-margin-of-safety/

P.S. Diversification has layers. There's asset diversification, there's investment strategy diversification, income diversification, etc. as a few examples.