According to one study active trading in an investment portfolio added value only 2% of the time. This point comes from an interesting post by Brian Livingston over at the Muscular Investing blog and underscores the fact that some actively managed long-only and hedge fund managers have notably underperformed the S&P 500 index in recent years.
What’s the trick to having a “Muscular Portfolio”, or a portfolio whose performance can endure over time? As Livingston points out, and we agree, the main ingredient to investing success is a consistent, repeatable mechanical process. This is the basis for subscribing to an asset allocation framework that involves spreading out investment exposure across various asset classes.
In the end, attempting to time the market ends up detracting from portfolio performance for most investors. Actively rebalancing a diversified portfolio to ensure adherence to a strategic allocation has shown to add value over time. Rather than trying to beat the markets, some investors are best served by using diversification as a way to make markets work for them.
Read more about “Muscular Investing” at Livingston’s blog here.