S&P 500 has hit fresh highs this week, after a month of war-induced jitters.
It’s a reminder to investors not to switch and ditch funds at the expense of their long-term strategy.
On average, data shows investors underperform the more they trade, even when buying and selling the same fund.
By delegating portfolio maintenance to a professional manager, this could go some way towards removing the temptation to act in haste.
Alex Davies, founder and CEO, Wealth Club

‘’The S&P 500 has roared back to life after a month of war-fuelled jitters, reaching a new record high, and rewarding those investors who remained calm amongst the panic. It’s a reminder that it’s important to stay invested and resist the temptation to switch and ditch funds, despite a relentless barrage of headlines. Day-to-day prices can shift wildly, often creating an urge to react to every fluctuation. It is understandable that many investors believe trying to anticipate these market oscillations will ultimately yield greater overall returns, leading to an adjustment of their holdings at the first sign of a market move. But this emotional response to volatility often leads to mistiming the market. This is why some investors are more prone to panic during market selloffs, or susceptible to overenthusiasm during bull runs in exciting sectors.

Yet by fighting the temptation to respond to every market movement and instead implementing a well-diversified strategy that can be comfortably held for an extended period, you could actually be far better off in the long run.

The dangers of overactivity

This risk of overactivity is also prevalent even when holding the same position for an extended period, as many self-managed investors can find themselves buying and selling the same fund as performance deviates.

It has been estimated that over the decade to the end of 2024, the average US open-ended and exchange-traded fund earned an aggregate total annual return of 8.2%, assuming an initial lump sum purchase and continued investment for the entire period. However, the average investor who held these funds but timed their buys and sells, rather than holding continuously, generated an annual return of 7.0%. This gap in performance amounts to nearly 15% of the fund’s total performance being missed by investors due to overactivity.

Yet this was just the average. The performance gap was wider in specialist equity funds, where investors underperformed their funds by an average of 1.5% annually, missing nearly 20% of their fund’s return. In these cases, investors would routinely buy into equity funds after a period of sustained outperformance, swept up in prevailing market optimism, only to sell on the heels of a severe drawdown.

Trend chasing

The same behavioural factors could also manifest as an urge to abandon long-term positions to jump on the latest trend. History is littered with cases of investors chasing exciting trends, often abandoning long-term diversified strategies in the interim, only to suffer persistent underperformance.

Fresh in the mind will be the dotcom bubble of the late 1990s, where investors aggressively purchased telecommunications and internet infrastructure companies, believing in the potential of a new digital economy. This speculative fervour pushed valuations well past traditional levels, and the market reversed sharply, delivering losses for those still with exposure to the sector. Demonstrating that even in exceptional cases when an underlying technological innovation may justify swarming to an emerging sector, the investment returns generated by continually chasing the next big trend rarely reward the initial speculation.

The art of delegation

To successfully quell this emotional response to market tumult and resist the temptation to chase endless new trends, a solution could be to take a step back. By focusing on maintaining a well-diversified portfolio, this could provide a degree of insulation against dramatic market conditions and help to cultivate a longer-term view of one’s investments. Furthermore, a portfolio that is inherently more resilient could allow you to be more at ease with the market, with the temptation to overtrade diminishing when your investments are less vulnerable to market swings.

This can be demonstrated by comparing the performance gap experienced by investors who held US allocation funds with those who held traditional equity funds or just the average fund. These funds maintain broad, highly diversified portfolios that are regularly rebalanced and designed for a set-and-forget holding approach, aiming to provide steady, but not stellar, returns.

Investors in these funds were far less likely to actively buy and sell, even during periods of market volatility, thereby allowing them to capture 97% of the funds’ aggregate total returns over the period. Yet this shouldn’t be considered unique to the funds themselves, rather it demonstrates how funds that obviate the need for investors to take any manual action in response to market moves can help them to avoid mistimed entries and exits.

A streamlined alternative

To that end, some investors may find it valuable to delegate the tasks of asset allocation and portfolio rebalancing to a professional manager. This could go some way towards removing the challenge of finding the middle ground between overactivity and maintaining sufficient vigilance to keep your portfolio comfortably positioned.

With this in mind, the Wealth Club Portfolio Service has been developed as a streamlined solution, exclusively for high net worth investors, providing a sensible, long-term alternative to self-management for those who don’t need advice.

Our service aims to remove the burden of deciding when to rebalance, which sectors to trim, or how to navigate a sudden market move, and comprises five managed portfolios across the risk-reward spectrum. Each portfolio incorporates thirty to forty-five carefully selected funds, offering varying proportions of broad exposure to global equities, bonds, and private assets.

Across all of our portfolios, trading is kept to a minimum due to the importance of maintaining conviction in owning funds through short-term performance volatility. Additionally, this solution operates on a non-advised basis, avoiding the charges investors incur when engaging a financial adviser, allowing the Portfolio Service to be priced similarly to a DIY investing platform.”