Last week I made the decision to sell around half of my equity portfolio. This is something I have been considering for some time, so it was not a knee-jerk reaction to recent market movements.
Many different contributing factors inspired me to make this decision, but the root cause was the issue of time.
The constraints of time
Currently, I do not have enough time to devote to reading and investment activities as I would like to have. Specifically, time limitations mean I cannot devote as much time to equity analysis as I would like to. This is not to say I do not have a chance to do my own research, I still hold my favorite stocks, but these are companies I know well and have held in my portfolio for years.
A lack of time is not the only reason I decided to sell, although it is the basis of the entire decision. Without enough time to appropriately value securities, my risk of making a mistake by holding onto a loser for too long or missing some key piece of information about a new investment is substantially increased. So, rather than trying to make more work for myself, to free up time and concentrate on my favorite stocks, I decided to sell.
But rather than ignoring the market altogether, I am going to use a different approach that I discussed in a previous article. The goal of this article was to try and get some idea of how I would invest a large cash sum today based on my experience of the past 10 years. To minimize downside and maximize upside, I argue in the article that around 50% of the portfolio should be devoted to an S&P 500 Index tracker and Russell 2000 Value Index tracker.
This may seem like an exceptionally boring investment strategy, but I believe it is the best strategy for both psychological and monetary reasons. With around 50% of my portfolio devoted to two index funds, I can rest safe in the knowledge my core portfolio will always generate steady returns. Picking stocks is a complicated process; and while I will be able to take more risk in the remaining 50% of the portfolio still devoted to individual equities, knowing I have well-diversified portfolio of more than 2,000 stocks as a backstop, producing steady historical returns of around 8% per annum, lets me rest easy at night.
The rest of my portfolio will still be devoted to single equities, namely deep value and high-quality stocks. It is here where I will still be able to pick the stocks I like, and perhaps achieve above market returns. With 50% of the portfolio in index funds making steady annual returns, the need for me to invest in this capital is also reduced. Even though I know there is no reason to be fully invested at all times, I still fall into the trap of wanting to avoid missing out on market gains. So in a way, this strategy also helps me limit my own psychological biases, biases I know exist and try to ignore but am still looking for ways to control.
Summary
Overall, my decision to invest 50% of my portfolio in low-cost funds was built out of a desire to free up more time for myself, but it also accomplishes other goals. There is plenty of evidence that shows the majority of investors fail to outperform or even match the performance of the S&P 500. While I am confident in my own investing ability, I know enough to understand that I am not smarter than the market.
With this being the case, I believe concentrating on my best ideas while simultaneously profiting from broader market gains is the best strategy to control psychological biases and improve long-term investment returns.
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