Rethink Investing – Strategic or Tactical?

In the modern era, “strategic” is a very desirable trait. Everybody wants to know how to be strategic, how to focus on the big picture, and how to set up a system that addresses the important and automates the trivial. We want to be able to run things like a visionary, where we only have to define our goals and establish some guidelines, and trust our minions to bring results.

Instead, we often end up being tactical. It’s very tempting to look at the immediate results and think what if? Our hindsight bias keeps begging us to find that clue in the past and makes us “tweak” our strategy, until we become micromanagers who falsely believe that we can foresee every change in our environment and adjust accordingly. We want to make sure we are always one step ahead; gradually we only see the tree in front of us, and not the forest we are in.

The same dynamic exists when we invest. As I discussed in a previous post in this series, you can achieve good annualized long-term returns if you buy and hold, and consistently invest even in market down turns. Whether you simply use market index funds or pick certain stocks with long-term prospects, the idea is being strategic. You design your portfolio with a purpose and you act on simple principles. You don’t check your investment prices daily and agonize over ups and downs.

However, you may find that certain unknown forces are drawing you into the tactical space. You start to think maybe you can do something more to make a better return, like timing your transactions, looking for a cheap stock to flip, or overweighing the sectors that you think will do well. It is possible that these tactics may increase your return if done right. Nevertheless, the more tactics you employ, the smaller the marginal benefit of each tactic, and the costlier each tactic becomes. You end up spending your limited time and energy on things that may boost your future return by 0.1%, instead of enjoying your life, work, and family at the moment.

You might say that’s exactly why you hire a professional to do it for you. But remember, if it’s costly for your mental energy, it’s costly for them too. Eventually the cost is returned to you in the form of fees and expense ratio. And have these professionals been able to deliver? According to this report, Tactical asset allocation funds did not outperform peers or index, either short-term or long-term. As a matter of fact, the higher expense ratio is one of the main reasons they underperform. In other words, you are paying more than you get. Tactics are costly, and you usually do not reap the proportional amount of benefit.

So why can’t we stay strategic? It might be an engrained bias toward finding cause and effect. We want to see what we do makes a difference, and we tend to believe the more we do, the more difference we make. In our heart we know the world doesn’t work that way; in reality, we always have less control than we think we have. However, we don’t seem to be able to let go. The more we want to control, the more decisions we need to make, and more mental energy we deplete. And one day we slip and make a wrong decision, or fail to make an important, strategic decision that costs us more than what we’ve made with our all-consuming tactics. So, you feel compelled to do something to mend the mistake, and the vicious cycle begins.

If you manage your own investments, it might be time for you to revisit how much time and energy you put in tactics, not strategies, and how much return you have reaped from them. Is the benefit worth your cost?